Federal vs. Private Student Loans

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Stanley Tate

#1 Student Loan Lawyer

Updated on March 15, 2023

There are two types of student loans available to borrowers to finance their education: federal and private student loans. Each loan type has different credit requirements, interest rates, and repayment options — as well as more forgiveness options and options to recover from default. It is important to carefully consider the pros and cons of each loan type before borrowing to pay for school. 

You can borrow two types of student loans to finance your education: federal and private student loans. Each option has its own set of pros and cons that you should consider before taking out a loan.

Federal student loans are offered by the U.S. Department of Education. In contrast, private student loans are offered by banks, credit unions, and other online or other lenders. Interest rates, repayment conditions, hardship assistance, and costs differ significantly between the two.

Ahead, we’ll explore the differences between federal and private student loans so that you can make an informed decision about which type of loan is best for you.

What are the differences between federal and private student loans?

The federal government offers a variety of student loans through the Department of Education. These loans come with fixed interest rates, income-driven repayment plans, loan forgiveness programs and typically don’t require a credit check.

Banks, credit unions, and other online lenders offer private student loans. They typically have variable interest rates and no federal benefits like income-based repayment options or loan forgiveness after 20 years of payments. Private lenders also require a credit check before approving a loan application, which means borrowers who have less than excellent credit will need a cosigner to qualify for the best repayment terms.

Learn More: Ways to Lower Student Loan Payments

Federal vs. Private Student Loans — How They Compare

You can borrow private and federal student loans simultaneously, but that doesn’t mean you should. The best choice is to first borrow the maximum amount of federal student loans. These loans offer better repayment terms as well as protections like loan forgiveness and hardship forbearances.

Learn More: How Do I Know If My Student Loans Are Federal?

Benefits of private student loans

Higher loan amounts. The Education Department has borrowing limits, which cap the amount of federal student loans that students can borrow each year. Private student loans can help fill the gap by allowing you to borrow enough money to pay for the educational costs not covered by grants, scholarships, work-study, and federal student loans. Read more about the difference between a grant and a loan.

Lower interest rates. Private student loans typically carry a lower interest rate than Direct PLUS Loans from the government, which means parents and graduate students who have a good credit score and steady income may be able to save money by borrowing from a private lender.

No upfront fees. While federal Direct Loans have an origination fee of up to 4.228%, private student loans typically don’t charge these fees.

Learn More: Reddit Student Loan Questions and Answers

Benefits of federal student loans

No credit requirements. Most federal student loans don’t require a credit check. Direct PLUS Loans, which are made to parents and graduate students, check your credit history for negative items but not your credit score. Even if you haven’t established a credit history, you can still borrow a federal loan.

Fixed interest rate. The biggest benefit of federal student loans is that they offer fixed interest rates. This means that your interest rate will never change, no matter how long it takes you to repay your loan.

Flexible repayment options. If you’re having trouble making your monthly payments, you can choose to extend your repayment period or lower your monthly payment by switching to an income-driven repayment plan. Those plans cap your loan payments at no more than 20% of your discretionary income.

Loan forgiveness programs. Several federal student loan forgiveness programs are available, which can help you get rid of your student debt if you work in certain careers or meet other requirements. In contrast, few lenders offer private student loan forgiveness. Read more about how to apply for student loan forgiveness.

Payment suspension. If you can’t make your monthly payments, you can temporarily stop making them without damaging your credit score using a deferment or forbearance.

Options to recover from default. You default on federal student loans after you miss payments for nine months (270 days). Even after that point, federal borrowers have options to get back on track using consolidation or loan rehabilitation.

In contrast, if you miss a payment on a private student loan, the loan can default. The lender can choose to “charge off” the loan after 120 days. That means the lender will no longer try to collect money from you, and the loan will be sold to a collection agency. The only ways to fix the default at that point are to pay the balance in full or negotiate a settlement. Read more about how to recover from private student loan default.

How do you borrow private student loans?

You can apply for private student loans through banks, credit unions, and online lenders. Use an online marketplace like credible.com to shop around for the best rates and loan terms.

Once you’ve chosen a lender, you’ll need to fill out an application and provide information about your financial situation, including your income, assets, and debts. The lender will use this information and your credit score to determine your creditworthiness and decide whether to approve your loan.

If you’re approved, the lender will send you a “loan estimate,” which will include information about the interest rate, fees, and terms of the loan. Make sure to review this carefully before accepting the loan.

Once you’ve accepted it, the money will be sent directly to your school — unless you’re applying for a loan to cover living expenses, in which case the funds will be sent to you.

Most lenders set the loan limit to the balance remaining after other financial aid has been applied to the student’s cost of attendance.

Learn More: How to Get Student Loan Cosigner Rights

How do you borrow federal student loans?

To borrow federal student loans, you must complete the Free Application for Federal Student Aid (FAFSA). This application will determine your eligibility for federal student loans and other types of financial aid. You can submit a FAFSA online at studentaid.gov.

The Education Department offers four types of loans:

  • Direct Subsidized Loans. These loans are given to students who can demonstrate financial need. The government pays the interest on the loan while the student is in school, during the six-month grace period after graduation, and during any deferment periods.

  • Direct Unsubsidized Loans. These are available to all students, regardless of financial need. The government does not pay the interest on the loan; instead, the interest accumulates and is added to the loan balance over time.

  • Direct PLUS Loans. PLUS loans are available to graduate or professional students and parents of undergraduate students. These loans typically have higher interest rates than other federal and private loan options. Read more about Parent PLUS loan forgiveness options.

  • Direct Consolidation Loans. These loans allow borrowers to combine all of their federal loans into one new loan. Read more about federal student loan consolidation.

Related: Do You Pay Back Subsidized or Unsubsidized Loans?

Bottom Line

The differences between federal and private student loans can be complex, but it’s essential to understand them before you borrow.

Remember, federal student loans are usually your best option. But if you need additional funds to cover your education expenses, private loans may be a good choice. Just make sure to shop around and compare offers from different lenders to find the best deal.

Want more student loan help? Sign up for my FREE email newsletter for tips and answers to common questions about student loans.

And if you need more personalized advice, don’t hesitate to schedule a call with me. I’ll point you in the right direction and ensure you’ve got the resources you need.

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