Federal Versus Private Loans
When it comes to paying for college, career school, or graduate school, federal student loans can offer several advantages over private student loans.
Need a loan to help pay for college? Consider federal loans first!
If you apply for financial aid, your school will likely include student loans as part of your financial aid package. It's important to understand what types of loans you are offered. Generally, there are two types of student loans—federal and private:
- Federal student loans and federal parent loans are funded by the federal government.
- Private student loans are nonfederal loans, made by a lender such as a bank, credit union, state agency, or school.
If you need to borrow money to pay for college or career school, start with federal student loans:
- Federal student loans are
- Direct Subsidized Loans and Direct Unsubsidized Loans
- Direct Parent Loans for Undergraduate Students (PLUS) Loans (for graduate and professional students)
- Federal parent loans are Direct PLUS Loans (for parents). Parents are fully responsible for paying these loans, even though they are taken out to benefit students.
What are the differences between federal and private student loans?
Federal student loans are made by the government, with terms and conditions that are set by law, and include many benefits (such as fixed interest rates and income-driven repayment plans) not typically offered with private loans.
In contrast, private loans are made by private organizations, such banks, credit unions, and state-based or state-affiliated organizations, and have terms and conditions that are set by the lender. Private student loans are generally more expensive than federal student loans.
The chart below provides a summary of the differences.
| Subject | Federal Student Loans | Federal Parent Loans | Private Student Loans* |
|---|---|---|---|
| When payments become due | Payments aren't due until after you graduate, leave school, or change your enrollment status to less than half-time. | You (the parent) can choose to put off payments until the student you borrowed for graduates, leaves school, or changes enrollment status to less than half-time. | Many private student loans require payments while you are still in school, but some do allow you to defer (put off) payments while in school. |
| Interest rates | The interest rate is fixed and is often lower than private loans—and much lower than some credit card interest rates. View the current interest rates on federal student loans: Link opens in a new windowhttps://studentaid.gov/understand-aid/types/loans/interest-rates. | The interest rate is fixed and may be lower than private loans—and much lower than some credit card interest rates. View the current interest rates on federal student and parent loans: Link opens in a new windowhttps://studentaid.gov/understand-aid/types/loans/interest-rates. | Private student loans can have variable or fixed interest rates, which may be higher or lower than the rates on federal loans depending on your circumstances. |
| Subsidies | If you have a financial need, you may qualify for a loan for which the government pays the interest while you're in school on at least a half-time basis and during certain other periods. This type of loan is called a subsidized loan. | These loans are not subsidized; therefore, you will be responsible for all the interest on your loans. | Private student loans are often not subsidized. In the case of an unsubsidized loan, you will be responsible for all the interest on your loan. |
| Credit check | You don't need to get a credit check for federal student loans (except for PLUS loans). For PLUS loans, Federal Student Aid (FSA) will check your credit before determining whether you are eligible. | FSA will check your credit before determining whether you are eligible. Learn how someone with an adverse credit history may qualify for a PLUS loan: Link opens in a new windowhttps://studentaid.gov/understand-aid/types/loans/plus. | Private student loans often require an established credit record or a cosigner. |
| Tax benefits | Interest may be tax deductible. | ||
| Consolidation and refinancing | Loans can be consolidated into a Direct Consolidation Loan. | Private student loans cannot be consolidated into a Direct Consolidation Loan but may be refinanced. | |
| Postponement options | If you are having trouble repaying your loan, you may be able to temporarily postpone or lower your payments. | You should check with your lender to find out about options for postponing or lowering your loan payments. | |
| Repayment plans | There are several repayment plans, including an option to tie your monthly payment to your income. | You should check with your lender to find out about your repayment options. | |
| Prepayment penalties | There is no prepayment penalty fee. | You need to make sure there are no prepayment penalty fees. | |
| Loan forgiveness | You may be eligible to have some portion of your loans forgiven if you work in public service. | Although many private lenders do not offer loan-forgiveness programs, some student loans from state agencies can be forgiven in certain circumstances. | |
| Where to get help | Contact your loan servicer first. If you have difficulty with your loan servicer, send feedback to FSA: Link opens in a new windowhttps://studentaid.gov/feedback-center. | Contact your loan servicer first. If you have difficulty with your loan servicer, contact the Consumer Financial Protection Bureau (CFPB) for assistance: Link opens in a new windowhttps://www.consumerfinance.gov/complaint. | |
*Private loans differ by lender and by the type of loan. Be sure you understand the terms of your loan, and keep in touch with your lender about any questions you may have.
How do I get a federal student loan?
To get a federal loan, you must first complete the Free Application for Federal Student Aid (FAFSA®) form. Learn more about applying for federal student aid: Link opens in a new windowhttps://studentaid.gov/h/apply-for-aid/fafsa.
U.S. Department of Education (ED), Office for Federal Student Aid (FSA). (n.d.). Types of financial aid: Federal versus private loans. Retrieved January 21, 2021, from https://studentaid.ed.gov