Federal vs. Private Student Loans: What’s the Difference?

Jacob Wade

Writer

There are two types of student loans you can get to pay for college: federal vs. private student loans.

While both types of loans can help pay for your college expenses, they both have different terms, conditions, forgiveness options, and repayment options available.

Issued by the government, federal student loans typically offer more payment flexibility and forgiveness options. In contrast, private loans, available from banks, credit unions, and other financial institutions, come with varying interest rates and payment terms.

When comparing federal vs. private student loans, it’s important to understand how each of them works. Moreover, consider what the benefits are, what the limitations are, and how you can apply for them.

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  • Federal student loans typically offer more competitive interest rates.
  • Private student loans typically have more loan term options and offer higher loan amounts.
  • Federal loans have more borrower protections, including income-based repayment, longer grace periods, forgiveness options, and loan payments can be paused by the federal government.
  • Many federal student loans don’t require a credit check.
  • Federal loans are typically the best first options for student borrowers, and private loans can help pay whatever federal loans don’t cover.

Federal vs. Private Student Loans Comparison

Federal student loansPrivate student loans
Interest ratesFixed rates between 5.50% to 8.05%Variable or fixed rates from 5% to 20% APR (or higher), depending on credit score and qualifications
Loan terms10 years5 to 20 years, depending on the loan
Maximum loan amount$31,000 for dependents
$57,000 for independent undergraduate
$138,500 for graduate program
Up to the total cost of attendance
Loan benefitsSubsidies available
Income-driven repayment
Grace period available
Forgiveness options available
Hardship assistance options
Flexible loan terms
May have lower rates
Consolidation and refinancingCan be consolidated into a Direct Consolidation LoanCan only be refinanced
Loan forgivenessMultiple optionsTypically no
Best for?Most student borrowersBorrowing amounts not covered by federal loans. Borrowers with great credit can lower their interest rates

How Federal Student Loans Work

The government provides low-interest loans to qualified borrowers through federal student loans. Additionally, students and parents can apply for federal loans, and you don’t need a credit score to qualify.

There are several types of federal student loans available:

Types of Federal Student Loans

  • Direct subsidized loans. Undergraduate students who qualify for “financial need” can get subsidized loans where interest does not accrue while in school and during deferred or grace periods.
  • Direct unsubsidized loans. Undergraduate students who don’t qualify for “financial need” can get unsubsidized loans. Consequently, these accrue interest while in school and during payment deferment and grace periods.
  • Direct PLUS loans. There are two types of PLUS loans: Grad PLUS loans are designed for graduate students and professionals pursuing advanced degrees. In contrast, Parent PLUS loans cater specifically to parents of students, providing financial assistance for their child's education.

Obtaining the loan

To apply for federal student loans, students and/or parents will need to fill out the Free Application for Financial Student Aid (FAFSA). This application helps determine eligibility for subsidized and unsubsidized loans, and any federal grant programs available. 

After turning in the FAFSA, you can review your loan options and select your loan amounts and terms.

Loan amounts

Federal student loans have limits on the loan amounts, depending on your chosen loans and program. Here’s how it breaks down:

  • Undergraduate loans (dependent students). Up to $31,000 in total loans, with no more than $23,000 in subsidized loans.
  • Undergraduate loans (independent students). Up to $57,000 in total loans, with no more than $23,000 in subsidized loans.
  • PLUS loans. Borrowers can receive up to $138,500 in total loans, including no more than $65,500 in subsidized loans. These loan totals encompass amounts borrowed for undergraduate study.

Interest rates

Interest rates on federal loans are fixed and set per school year. Current interest rates for the 2022-2023 school year are as follows:

  • Direct Subsidized Loans and Direct Unsubsidized Loans have a fixed 5.50% APR interest rate
  • Direct unsubsidized graduate or professional loans have a fixed interest rate of 7.05%
  • Direct PLUS loans (parent or graduate/professional) have a fixed interest rate of 8.05%

Repayment terms

Standard repayment terms for federal student loans are set to a 10-year repayment schedule. But you can choose between several other repayment options, including:

  • Graduated repayment. A 10-year repayment schedule where payments start lower, and then increase over time.
  • Extended repayment. Fixed or graduated repayment schedule that can be extended up to 25 years.
  • Income-driven repayment. Several plans adjust your payment based on your discretionary income and family size. Moreover, these plans can extend payments up to 25 years in length, and the remaining balances may be forgiven.

How Private Student Loans Work

Private lenders, including banks, credit unions, and online lenders, typically determine rates and terms based on your creditworthiness when providing private student loans. This includes assessing your credit score, income, debt-to-income ratio, and other financial factors.

Private student loans are available to help cover college expenses. Alternatively, if you have existing student loan debt, you can explore the option of refinancing into private loans. In this manner, you can optimize your financial strategy and potentially secure more favorable terms.

Obtaining the loan

To apply for a private student loan, you need to find an online lender or bank that offers the type of loan you are looking for. Online lenders typically offer the best rates but you must have excellent credit to get the lower rates.

You can apply for private student loans online by submitting your personal and financial information. As well as any supporting documentation needed. Many private lenders offer a “pre-qualification” tool that does a “soft” credit check first and will show you your potential rates and loan terms before completing a full application.

Loan amounts

Many private student loan lenders offer up to 100% of your college costs with no caps on the loan amount. However, some private lenders cap the total amount that can be borrowed at around $250,000 for undergraduate and up to $500,000 for graduate loan totals.

To determine the loan amounts available for your college costs and program, you'll need to consult with your lender.

Interest rates

Interest rates on private student loans are intricately tied to borrowers' creditworthiness and financial situation. Rates can vary significantly, ranging from as low as 5% APR to as high as 16.99% APR or even higher. Notably, borrowers with excellent credit and a substantial income stand a better chance of qualifying for the lowest interest rates available. Whereas those with a poor credit history and lower income may have to pay much higher rates.

Rates can be variable or fixed, depending on the loan selected. Furthermore, variable interest rates can go up or down, usually dependent on the Federal Funds rate and other factors. In contrast, fixed rates stay the same for the entirety of the loan.

Repayment terms

Private lenders typically offer more repayment term options than federal loans. Additionally, loan repayment plans span from 5 to 20 years. Moreover, some lenders allow you to choose your loan term and set the payment accordingly. 

Dollar bag, graduation cap on row of coins on table. Guide to understanding federal vs. private loans.

Pros and Cons of Federal Student Loans

If you're considering a federal student loan, be sure to consider both the benefits and drawbacks before you apply.

Federal vs. Private: Federal student loans pros

  • Federal student loans offer subsidies, allowing borrowers to avoid interest during school and grace periods
  • Federal student loans have several loan forgiveness programs available
  • Federal student loans have fixed interest rates and are typically lower than many private lenders
  • Moreover, federal student loans provide income-driven repayment plans, allowing adjustments to payments based on a borrower’s discretionary income.

Federal vs. Private: Federal student loans cons

  • Federal student loans have origination fees, which are charged upfront
  • Borrower limits may prevent a federal student loan from covering the total costs of college
  • Federal student loans choose your loan servicer for you
  • Interest rates are set by the government, and can’t go lower based on your credit profile

Pros and Cons of Private Student Loans

Whether you're considering private loans because you're not eligible for a federal student loan, or because you need to borrow a larger amount for your education, it's important to understand how going with a private lender can impact you.

Federal vs. Private: Private student loans pros

  • Private student loans provide flexibility in terms, offering a range of options that empower you to customize your monthly payment. This flexibility helps borrowers tailor their repayment plans to better suit their financial circumstances.
  • You may qualify for a lower interest rate on a private loan if you have excellent credit
  • You can borrow more to cover the costs of college with private student loans
  • Moreover, federal student loans provide income-driven repayment plans, allowing adjustments to payments based on a borrower’s discretionary income.

Federal vs. Private: Private student loans cons

  • Private lenders typically don't offer student loan forgiveness programs
  • Income-based repayment options are usually not available for private loans
  • While the government can pause payments on federal student loans during national emergencies, private student loans may lack the same suspension option.
  • Private loans may come with higher rates and variable rates. which may end up costing you more in the long run

FAQs

Is it better to have federal vs. private student loans?

Undoubtedly, selecting federal student loans consistently proves to be a superior choice over private student loans. Additionally, federal loans offer numerous advantages, such as borrower protections, greater flexibility, and potential subsidies. Moreover, federal loans offer extensive borrower protections, enhanced flexibility, a plethora of forgiveness options, and the potential for subsidies. Typically, new students with limited credit history can obtain lower fixed interest rates through federal student loans. Conversely, private loans suit borrowers with excellent credit who require no forgiveness options and intend to rapidly pay down their loans.

Related: How To Consolidate Student Loans (Federal And Private)?

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Author picture

I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.