Federal vs. Private Student Loans: Which Is Better for You?

 November 22, 2021
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While both federal and private student loans can help you pay for college or graduate school, these two loan types have some key differences.

In most cases, it’s advisable for students to max out their eligibility for federal student loans before turning to private ones. Since federal loans come with borrowing limits, however, you might need additional money in the form of a private student loan to cover a funding gap.

If you’re a parent borrower, on the other hand, you may want to consider choosing whichever loan type offers you the lowest interest rate.

This guide will take a closer look at federal versus private student loans, so you can decide which funding option is right for you. Let’s look at:

Federal vs. private student loans: How they compare

Federal student loans come from the federal government, specifically the Office of Federal Student Aid. They tend to come with low, fixed interest rates, flexible repayment plans and forgiveness options.

Private student loans, on the other hand, come from private lenders, such as banks, credit unions or online lenders — you might also be able to find a private student loan from your state or school. The interest rate and terms you get on a private student loan will vary by lender and depend on factors like your credit score and income.

This chart gives a quick comparison of federal versus private student loans. Once you’ve looked it over, keep reading for an in-depth look at federal and private loans.

Federal student loans Private student loans
Types of loans Direct subsidized loans, Direct unsubsidized loans, grad PLUS loans, parent PLUS loans Varies by lender, but some offer loans for undergraduates, graduate students and parents
Eligibility requirements U.S. citizen or eligible noncitizen attending an eligible degree or certificate program at least half-time Varies by lender
Credit check to qualify? No (except in the case of PLUS loans, which require that you don’t have “adverse credit”) Yes (most undergraduates apply with a cosigner, such as a parent, to qualify)
Interest rate types Fixed Fixed or variable
Interest subsidy Yes (the government covers the interest that accrues during the grace period on subsidized loans) No
Grace period Yes (while you’re in school and for six months after you graduate) Varies by lender (but most let you defer payment until six months after you graduate)
Borrowing limits Direct loan limits:
● $31,000 for undergraduate dependent students
● $138,500 for graduate and professional students
PLUS loan limits:
● Up to the cost of attendance of your school, minus any other financial aid you’ve already received
Typically up to the cost of attendance of your school, minus any other financial aid you’ve already received
Repayment plans Standard plan, extended repayment, graduated repayment, income-driven repayment Varies by lender, but you’ll usually choose your terms when you borrow.
Deferment and forbearance options Yes Varies by lender
Eligible for forgiveness programs Yes No, private student loans aren’t eligible for federal forgiveness programs (however, you might find repayment assistance from your state, employer or another alternative program)

How federal student loans work

The federal government offers a variety of student loan types and repayment plans to undergraduates and their parents, as well as to graduate students. Here are the details on federal student loans:

Types of federal student loans

Federal Student Aid offers the following types of student loans:

  • Direct subsidized loans
  • Direct unsubsidized loans
  • Grad PLUS loans
  • Parent PLUS loans

If you already have federal student loans, you can also apply for a direct consolidation loan, which combines all your loans into a single loan with one monthly payment.

Eligibility requirements

When comparing eligibility requirements for federal versus private student loans, you’ll find that federal student loans seem to have easier criteria. The main requirements are that you’re a U.S. citizen or qualifying noncitizen enrolled at least half-time in an eligible degree or certificate program.

Grad PLUS and parent PLUS loans also have a credit requirement, though it’s not particularly strict. If you can’t meet it, you could try applying with an endorser.

Interest rates and fees

Federal student loans come with relatively low, fixed interest rates that stay the same over the life of your loan. Most also come with an origination fee that’s charged when your loan is disbursed.

While rates and fees vary depending on the year you borrow, here’s what’s currently on offer:

Type of loan Type of borrower Interest rate Origination fee
Direct subsidized and unsubsidized loans Undergraduate students 3.73% 1.057%
Direct unsubsidized loans Graduate or professional students 5.28% 1.057%
Grad PLUS or parent PLUS Graduate or professional students, parents 6.28% 4.228%

Borrowing limits

Federal student loans have a lot of benefits, such as low rates and flexible repayment options, but there’s a catch: You can only borrow a certain amount. Dependent undergraduate students, for example, can take out a maximum of $31,000 for their education.

As for PLUS loans, both grad students and parents can borrow up to the full cost of attendance, minus any other financial aid already received.

Repayment plans

Most federal student loans are automatically put on the standard repayment plan that spans 10 years, but they don’t have to stay there. If you need to adjust your monthly student loan payments, you have options, including:

Deferment and forbearance

Federal student loans are eligible for deferment and forbearance programs: If you need a break from your payments, both of these programs let you pause payments for a period of time.

Forgiveness programs

The government offers several forgiveness programs that could result in a discharge of your student loan balance. A couple examples are:

The government also provides other avenues for loan cancellation, including loan discharge for borrowers with a total and permanent disability or those who were defrauded by their schools.

Pros and cons

Federal student loans have both pros and cons for borrowers, though the advantages tend to outweigh the downsides. Here are some factors to consider before you borrow:

Pros Cons
Low, fixed interest rates No statute of limitations — meaning if you default, that debt never goes away
Flexible repayment terms Government has power to garnish your wages, tax refund or Social Security benefits if you don’t pay back your student loans
Eligible for forbearance and deferment Some borrowers complain about bad experiences with loan servicers
Potential for loan forgiveness Rules and programs can change under new administrations

The benefits of federal student loans, for the most part, outweigh the downsides, as long as you stay current on your debt. As you can see, however, defaulting on your student loans could lead you into major financial trouble with lifelong consequences.

How private student loans work

Federal and private student loans can both be used to pay for tuition, fees, room and board and other expenses that go along with attending college. However, comparing federal versus private student loans reveal some key differences between these two loan types.

Types of private student loans

Depending on the lender, you might find private student loans for undergraduate students, graduate students and parents. Some lenders also differentiate their loans by graduate program; for example, online lender SoFi has loans designed specifically for law and MBA students, as well as general graduate student loans.

Unlike Federal Student Aid, private lenders don’t offer subsidized student loans. Most loans accrue interest right away, and you’ll be responsible for covering all the accrued interest charges.

Eligibility requirements

Private lenders look at a few factors before approving you for a loan, including the program you’ll be attending, your credit score and your income. The majority of undergraduates must apply with a cosigner, since they typically can’t meet the credit and income requirements on their own.

Interest rates and fees

Interest rates and fees will vary by lender. At time of borrowing, you can usually choose between a fixed and a variable rate.

Borrowers with the strongest credit will typically qualify for the lowest interest rates, so it’s a good idea to shop around with several lenders to find the best loan for you. Along with looking for the lowest interest rate, prioritize lenders that charge low or no fees on their student loans.

Borrowing limits

Most private lenders let you borrow up to the school-certified cost of attendance, minus any other financial aid you’ve already received.

Repayment plans

Most lenders set you up on a repayment plan with fixed payments on a term of five to 15 years. You usually choose your loan terms at the time you borrow and are expected to stick with them.

Deferment and forbearance

Private student loans are not eligible for federal deferment or forbearance options, but some lenders will let you pause payments if you lose your job or go back to school.

Forgiveness programs

Private student loans are also ineligible for federal forgiveness programs. That said, you might be able to find repayment assistance options from your state, school or employer.

Pros and cons

Before borrowing a private student loan, consider these pros and cons:

Pros Cons
Can borrow up to your school’s cost of attendance Must pass a credit check to qualify (or apply with a cosigner who can)
Can shop around to find the lowest rates Might come with higher interest rates than federal loans
Might qualify for deferment or forbearance, if your lender offers it Not as many repayment options as federal student loans
Has a statute of limitations, meaning a lender can’t pursue repayment if you’ve been in default for a certain period of time (note that it can bring you to court for nonpayment before this statute of limitations is up) Not eligible for federal forgiveness programs

Not only can private student loans come with higher interest rates than some federal student loans, but they also typically don’t have the same borrower protections. That said, private student loan debt doesn’t last forever the way that federal debt does, but instead has a statute of limitations.

A private lender can bring you to court for failing to repay your loan, though it doesn’t have the power to garnish your wages or offset your tax refund. And while it’s never a good idea to default on your loans, it’s worth noting that private lenders don’t have the same powers of collection as the federal government.

Why federal student loans are usually better than private ones

If you’re a student borrower, it’s usually a good idea to max out your eligibility for federal student loans before opting for a private loan. That’s because federal loans come with low interest rates and flexible repayment terms, including income-driven repayment.

Since federal loans come with borrowing limits, however, you might need a private student loan to cover a gap in funding. As for parent borrowers, the choice isn’t so clear-cut. If you can find a private student loan with a better rate than a parent PLUS loan, it might be worth opting for a private loan.

Either way, try your best to keep borrowing to a minimum, so you don’t end up with burdensome education debt. If you can afford it, consider making small or interest-only payments while in school to cut down on interest charges.

Students might also pursue alternative funding options, such as income from a part-time job or scholarship winnings, to cover costs and avoid borrowing too much in student loans.

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