Private vs. Federal College Loans: What's the Difference? (2024)

Federal student loans are provided by the government. There are two kinds: subsidized and unsubsidized loans. On the other hand, the best student loans offered by private lenders are usually from specific student loan lenders or financial institutions. Interest rates tend to be lower on federal student loans than on private loans, but it's always smart to consider all of your options.

Key Takeaways

  • You can obtain a student loan through the federal government or a private lender.
  • Federal loans generally have more favorable terms, including flexible repayment options.
  • Students with "exceptional financial need" may qualify for subsidized federal loans, while unsubsidized loans are available regardless of financial need.
  • The interest is usually lower on federal loans compared to private loans.
  • Repayments and interest on federal loans were suspended in 2020 because of the COVID-19 pandemic. After multiple extensions and issues, the federal government released its Saving on a Valuable Education plan in July 2023 and began accepting applications in August.

Private vs. Federal College Loans: What's the Difference? (1)

Student Debt Relief 2023

The U.S. Supreme Court blocked the student loan forgiveness plan from being implemented in June 2023, ruling that President Joe Biden had exceeded his authority in issuing the plan. The Biden administration responded by rolling out a new program called Saving on a Valuable Education (SAVE). The plan allows eligible borrowers to reduce their monthly payments, shorten the maximum period for loan repayment, and avoid some interest charges.

The application for the SAVE plan became available on Aug. 22, 2023. People already enrolled in the REPAYE plan will automatically be placed on the SAVE Plan.

Private Loans

Private college loans can come from many sources, including banks, credit unions, and other financial institutions. You can apply for a private loan anytime and use the money for whatever expenses you wish, including tuition,room and board,books, computers, transportation, and living expenses.

Unlike some federal loans, private loans are not based on a borrower's financial needs. You may have to pass a credit check to prove your creditworthiness. If you have little or no credit history or a poor one, you might need a cosigner on the loan.

Private loans can come with higher borrowing limits than federal loans. The repayment period for student loans from private lenders may also be different. While some may allow you to defer payments until after you graduate, other lenders might require you to begin repaying your debt as you attend school.

Federal Loans

The U.S. Department of Education administers federal student loans. They tend to have lower interest rates and more flexible repayment plans than private loans.

To qualify for a federal loan, you will need to complete and submit the government's Free Application for Federal Student Aid (FAFSA).

The FAFSA asks questions about the student's and parent's income, investments, and other relevant matters, such as whether the family has other children in college. Using that information, the FAFSA determines your Expected Family Contribution (EFC). That figure is used to calculate how much assistance you're eligible to receive.

The confusingly-named EFC has been renamed the Student Aid Index (SAI) to clarify its meaning. It does not indicate how much the student must pay the college. It is used to calculate how much student aid the applicant is eligible to receive. The relabeling will be implemented by the 2024-2025 school year.

The financial aid offices at colleges and universities decide how much aid to offer by subtracting your (SAI) EFC from your cost of attendance (COA). The cost of attendance includes tuition, required fees, room and board, textbooks, and other expenses.

To help make up the gap between what college costs and what the family can afford to pay, the financial aid office puts together an aid package. That package might include some combination of federal Pell Grants, federal loans, and paid work-study jobs.

Schools can also draw on their own resources to offer—for example, merit scholarships. The fundamental difference between grants and loans is that grants never have to be paid back (except in rare instances), while loans eventually do.

Federal Student Loan Relief

The federal government made provisions to help student loan borrowers during the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in March 2020, halted mandatory payments on federal student loans and froze the interest charged on them.

A separate Biden administration plan to forgive part of the student loan debt of millions of student loan debtors was blocked by the U.S. Supreme Court in June 2023.

The administration immediately rolled out a new plan called Saving on a Valuable Education (SAVE). The program allows eligible borrowers to reduce their monthly payments, shorten the maximum period for loan repayment, and avoid some interest charges.

The application for the SAVE plan became available in August 2023. People already enrolled in the REPAYE plan will automatically be placed on the SAVE Plan.

It's important to note that these proposed changes only applied to federal student loans, not private ones. Borrowers who need help with their private loans should approach their lenders for any provisions they may offer.

Types of Federal Loans

The William D. Ford Federal Direct Loan Program isthe largest and best-known of all federal student loan programs. These loans are sometimes called Stafford loans, the name of an earlier program. There are four basic types of federal direct loans:

  • Direct subsidized loan
  • Direct unsubsidized loan
  • Direct PLUS loan
  • Direct consolidation loan

Note that a provision in the American Rescue Plan makes all student loan forgiveness federally tax-free from Jan. 1, 2021, to Dec. 31, 2025. Some states may tax the amount of a student loan forgiven as income.

Direct Subsidized Loans

These loans are given to students depending on financial need. The government subsidizes the interest on the loan while the student is enrolled at least half-time.

You are not charged interest on subsidized loans until you graduate, and you have a six-month grace period after leaving school before you need to begin making loan payments.

If your loan is deferred, you will not be charged interest during that period.

Direct Unsubsidized Loans

Unsubsidized loans are available to students regardless of financial need. Unlike subsidized loans, their interest begins accruing once you receive the funds and continues until the loan is repaid in full.

Independent students who apply for a direct loan (as opposed to dependent students applying with their parents) can qualify for a higher amount of unsubsidized funds.

Direct loans have several attractive benefits, including:

  • No need to pass a credit check
  • A low, fixed rate of interest (private loans often have variable rates)
  • Several flexible repayment plans
  • No penalty for prepaying the loan

However, they also have some downsides, such as:

  • Low loanlimits
  • The need to file a new FAFSA form every year to maintain eligibility
  • Stricter limits on how you can use the money than with private loans

Direct PLUS Loans

PLUS loans are designed for the parents of college students and are not based onfinancial need. They have several appealing features, including the possibility of borrowing the total cost of attendance (minus any other financial aid or scholarships).

They also carry a relatively low, fixed interest rate (but higher than the rates on other direct loan types) and offer flexible repayment plans, such asthe ability to defer payment until thestudent graduates.

PLUS loans require that the parent applicant pass a credit check (or obtain a cosigner or endorser) and reapply for funds each academic year. The parent is also legally responsible for repaying the loan.

In addition to the parents of undergraduate students, PLUS loans are available to graduate and professional students.

Direct Consolidation Loans

When it comes time to repay student loans, the government offers direct consolidation loans, which you can use to combine two or more federal education loans into a single loan with a fixed interest rate based on the average rate of the loans you are consolidating.

You can't consolidate private loans using the federal program, but private lenders can consolidate your loans, both private and federal, by paying off your old loans and issuing you a new one.

Consolidating with a private lender can get you a lower interest rate in some cases, but you'll lose the flexible repayment options and consumer protections that come with federal loans.

If you have both federal and private loans, it makes sense to consolidate the federal ones through the government program and refinance the others with a private lender.

What Are the Differences Between Federal and Private College Loans?

Private college loans come from sources such as banks, credit unions, and other financial institutions. Federal student loans, administered by the U.S. Department of Education, usually have lower interest rates and more flexible repayment plans.

What Are the Basics of Private College Loans?

Unlike government loans, private loans aren't based on financial need. Borrowers may have to pass a credit check to prove their creditworthiness. Borrowers with little or no credit history or low credit scores may need a cosigner on the loan. Private loans may have higher borrowing limits than federal loans.

How Do You Borrow College Money Under Federal Loan Programs?

To qualify for a federal loan, you will need to complete and submit the Free Application for Federal Student Aid, or FAFSA. You'll answer questions about your and your family's income and financial circ*mstances. Using that information, the FAFSA determines the Expected Family Contribution, which is being rebranded as the Student Aid Index. That figure is used to calculate how much assistance you're eligible to receive.

The Bottom Line

Loans are among the resources available to help students and their families pay college bills. Private and federal loans have advantages and disadvantages, depending on your situation.

Private loans, administered by banks and credit unions, are much like any other kind of loan, meaning a credit check will be required. Federal loans are often needs-based, with lower interest rates and repayment flexibility. Those who do the necessary legwork will find options that best meet their needs.

Private vs. Federal College Loans: What's the Difference? (2024)


Private vs. Federal College Loans: What's the Difference? ›

Generally, there are two types of student loans—federal and private. Federal student loans

Federal student loans
A Direct Subsidized Loan is a type of federal student loans (made through the William D. Ford Federal Direct Loan Program) where a borrower isn't generally responsible for paying interest while in an in-school, grace*, or deferment period. › topic › article › direct-subsidized-loan
and federal parent loans: These loans are funded by the federal government. Private student loans: These loans are nonfederal loans, made by a lender such as a bank, credit union, state agency, or a school.

Is it better to have federal or private student loans? ›

Federal student loans are generally recommended due to fixed interest rates, repayment flexibility and forgiveness options. However, if you require more funds than federal limits allow or have excellent credit, private loans might be more favorable with potentially lower rates or higher borrowing amounts.

What are the disadvantages of private student loans? ›

The Cons of Private Student Loans

Most private student loans do not offer income-driven repayment plans. Private student loans do not qualify for teacher loan forgiveness or public service loan forgiveness. Private student loans have limited options for financial relief when a borrower experiences financial difficulty.

Can private student loans be forgiven? ›

The only times private student loans can currently be forgiven are in the cases of death or permanent disability—but even in those instances, discharge is typically dependent on your lender's policy.

What is considered a private loan for college? ›

Private student loans—also known as personal student loans— are offered by private lenders to provide funds to pay for educational expenses. They are not part of the federal student loan program and generally do not feature the flexible repayment terms or borrower protections offered by federal student loans.

What is the downside of a federal student loan? ›

Some drawbacks of federal direct loans are that there are no subsidized federal direct loans for graduate students, borrowers who default or become otherwise unable to repay their federal direct loans will not be able to escape them by declaring bankruptcy, and undergraduates who apply for direct unsubsidized loans and ...

Is Sallie Mae a federal or private loan? ›

Sallie Mae services private student loans for a variety of degrees, including undergrad, MBA, medical school, dental school and law school. A private loan with a lender like Sallie Mae covers up to 100 percent of your education costs, while federal loans come with borrowing caps that might not cover all your expenses.

Do private student loans hurt your credit? ›

Having a student loan will affect your credit score. Your student loan amount and payment history are a part of your credit report. Your credit reports—which impact your credit score—will contain information about your student loans, including: Amount that you owe on your loans.

How hard is it to get private student loans? ›

They'll run a credit check to see how you've handled debt in the past. It can be tough to qualify independently without a credit history or a limited one. Many lenders won't advertise a specific minimum credit score, but a score in the mid-600s or higher can help you meet private student loan credit score requirements.

Which student loan type has the most benefits? ›

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.

Can I convert my private student loans to federal? ›

Federal student loans can become private loans via refinancing. But there's no way to transfer private student loans to federal. Borrowers who refinance federal student loans into private loans cannot undo this move and should understand its risks.

How do I get rid of a private student loan? ›

Key Takeaways
  1. Private student loans are only forgiven when the borrower becomes permanently disabled or dies.
  2. Your relief options will depend on your lender and loan agreement. ...
  3. Other options include deferment or forbearance, refinancing, applying for repayment assistance, negotiating with your lender and bankruptcy.

Do private student loans go to your bank account? ›

Private student loan funds are usually disbursed (sent) directly to your school's financial aid office. Personal loan funds are deposited directly into the borrower's bank account.

What GPA do you need for private student loan? ›

Yes, there are private student loan providers that don't have GPA requirements for their loans. Unlike federal student loans which are based on financial need and generally don't have academic requirements, private loans may have various qualifications depending on the lender, though many don't require a minimum GPA.

Does FAFSA include private loans? ›

When you apply for financial aid, you might be offered loans as part of your school's financial aid offer. A loan is money you borrow and must pay back with interest. Student loans can come from the federal government, from private sources such as a bank or financial institution, or from other organizations.

Is it a good idea to get a private student loan? ›

Private student loans can come with potential issues for borrowers, such as limited repayment plans, ineligibility for federal forgiveness programs and fewer relief options during financial hardship. They often require a creditworthy cosigner and have variable interest rates, which may increase the cost over time.

What is the advantage of taking out a federal student loan over a private student loan? ›

The interest rate on a federal student loan is fixed and is typically lower than private loan rates. No credit check or cosigner is required to qualify for most federal student loans. Repayment doesn't begin until after you've left college or dropped below half-time enrollment.

What are the pros and cons of a private student loan? ›

If you are contemplating a private student loan, weigh its advantages (like flexible interest rates and added perks) against its disadvantages (such as needing a good credit score or a cosigner, and limited support during financial difficulties).

Are there any advantages to private student loans? ›

Instead of being assigned a fixed-rate federal loan with a standard 10-year term, you might opt for a variable rate and a shorter or longer repayment plan. Private education debt also tends to have a higher borrowing limit, allowing you to cover any gaps in your school's cost of attendance.

What are the pros and cons of applying for a federal student loan? ›

In this article:
Pros and Cons of Student Loans
Can help you afford a cost-prohibitive educationStudent loan payments can become financially crippling
Accessible to college students with no or limited credit historiesDefault can lead to very serious consequences
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Sep 28, 2022

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