Comparing Federal vs. Private Student Loans

December 20, 2022

Students looking to borrow money to help pay for college have broadly two options: federal student loans and private student loans. When it comes to federal vs. private student loans, each type has its pros and cons. Federal loans offer fixed interest rates, flexible repayment options, and plenty of protections to assist struggling borrowers in the future. On the other hand, private student loans can be a better option, depending on your credit history and what kind of federal loans you are eligible for.

In this article, we analyze the differences between each type of loan and how it might impact your college costs. If you’re ready to start applying for your college loan, consider checking out our best student loan options.

Federal vs. Private Student Loans

Families have several options for financing college costs, including federal student loans, federal parent loans, private student loans and private parent loans. Most borrowers should look to federal loan programs first, as they typically have more favorable terms than those available from private lenders.

The federal government provides student loans and parent loans through the Federal Direct Stafford and Federal Direct PLUS loan programs. The specifics of these programs are determined by law.

Private student loans and parent loans are made by banks, credit unions and other financial institutions, as well as state loan agencies. Each sets the terms of its loan programs. Private loan programs are designed to be profitable for the lender (except loans provided by state loan agencies), with loan eligibility and the cost of borrowing tied to the borrower’s creditworthiness.

Overview of Federal Student Loans vs. Private Loans

	Federal Student Loans	Private Student Loans
Source of funds	Funded by the federal government via the U.S. Department of Education	Funded by banks and private institutions
Interest rates	Fixed, relatively low rate	Vary widely depending on your credit
Origination fee	Between 1 & 4%	None
Loan limits	Vary; as low as $9,500 per year up to a total of $57,500 for undergraduates	Vary; much higher in general
Types of loans	Direct subsidized loans, direct unsubsidized loans, direct PLUS (Parent PLUS and Grad PLUS) loans	Undergraduate student, graduate student, parent, and personal loans
Repayment options	Flexible range of repayment options	More limited repayment options
Loan forgiveness available	Yes	Very rarely
Safety net & protections	Extensive safety net	Limited safety net
Eligibility requirements	Need, credit check required for direct PLUS loans	Credit history and income

What Are Federal Student Loans?

Federal student loans, also known as Direct Loans, are funded by the federal government through the U.S. Department of Education’s William D. Ford Federal Direct Loan Program. Terms of federal student loans are set by the Higher Education Act of 1965.

Federal loans have clearly-defined annual and aggregate loan limits. The limits for subsidized federal loans are fairly low, while direct PLUS loans are limited only by the annual cost of attendance, with no aggregate limits.

Pros

Low, fixed interest rate not dependent on credit history
Flexible repayment options
Relatively easy to access
Loan forgiveness available to public servants and certain occupations
Loan interest is eligible for tax deduction
Virtually no interest accrued on federal Stafford loans until you graduate
Income-driven payment plans available
Better safety net for struggling borrowers

Cons

Loan fees of up to 4% apply, depending on the type of loan
Lower annual and aggregate loan limits, especially for Stafford loans
Federal debt collectors could garnish your wages or take your tax refunds if you default on your loan
Limitations on how you spend your funds
You need to resubmit the FAFSA every year to maintain eligibility

Types of Federal Student Loans

There are two categories of federal student loans: federal direct loans, sometimes also called Stafford loans, and direct PLUS loans. Direct loans can be subsidized or unsubsidized, making three main types of federal student loans:

Direct subsidized loans: These loans are only offered to undergraduate students with financial needs. You don’t need a credit history to qualify, and you won’t pay any interest on your loan while you’re studying.
Direct unsubsidized loans: Graduate and undergraduate students need to meet certain requirements to be eligible for these loans, but this does not include financial needs or credit history. In contrast to direct subsidized loans, interest starts to accrue as soon as your loan is disbursed.
Direct PLUS loans: These are offered to graduate students and parents in the form of Grad PLUS and parent PLUS loans respectively. Like Stafford loans, they have fixed interest rates set by the federal government, but rates are slightly higher, and origination fees are significantly more. Borrowers also need to demonstrate good credit.

There are a couple of other kinds of federal student loans, such as Perkins loans, which are available to a limited number of students with extremely high financial needs, and have lower fixed interest rates than other federal student loans. Students and graduates can also access direct consolidation loans to multiple federal student loans in order to streamline repayments and get a fixed interest rate for all of their debt.

Costs of Federal Student Loans

Federal student loans have low fixed interest rates that do not depend on the borrower’s credit history. Interest rates on subsidized Federal Stafford loans are effectively zero during the in-school and grace periods, as well as periods of authorized deferment. This means that you won’t start accruing interest until you graduate. While you don’t need to start repaying unsubsidized Stafford loans and direct PLUS loans until after graduation, you will accrue interest while you’re still studying.

Unlike most private student loans, federal student loans come with an origination fee, which varies significantly depending on the type of loan. The origination fees on the Federal Stafford loan are about 1%, while the loan fees on the Federal PLUS loan are just over 4%. Note that these fees will be deducted from your overall loan amount: therefore, if you are approved for a Federal PLUS loan of $10,000, for example, you’ll only actually receive $9,600 after the fees have been deducted.

Repayment Options for Federal Student Loans

Federal student loans generally have more flexible repayment options than private student loans. Federal student loans offer extended repayment, graduated repayment and income-driven repayment plans in addition to standard 10-year repayment. Federal student loans also have a variety of loan forgiveness options for borrowers who work in specific occupations.

See our Income-Driven Repayment Plan Calculators and estimate your loan repayments:

The interest on federal student loans and private student loans is eligible for the student loan interest deduction. The student loan interest deduction is an above-the-line exclusion from income for up to $2,500 a year in interest on federal and private student loans. The student loan interest deduction can be claimed on your federal income tax return even if you do not itemize your return.

What Are Private Student Loans?

Private student loans are funded by banks and other financial institutions. Portfolios of private student loans may be funded by the capital markets through securitization. Each lender sets its own loan terms, subject to restrictions established by the Truth in Lending Act of 1968 (TILA).

Private lenders typically offer higher annual and aggregate loan limits than federal loans, especially Federal Stafford loans which have relatively low annual loan limits and aggregate loan limits.

Pros

Higher loan limits
No origination fees
You could find low-interest rates if you have an excellent credit history
Complete freedom on how you spend the funds

Cons

Higher interest rates which are dependent on your credit history
Interest will start to accrue as soon as you take out the loan
May need a cosigner if you don’t have a credit history
Less flexible repayment plans, especially for longer repayment terms
No loan forgiveness
Only around half have death or disability discharges

Types of Private Student Loans

Essentially, a private student loan is any kind of loan given to students or parents of students, that is not given by the government. Therefore, there are a wide range of private student loan options available, and interest rates, as well as loan terms and conditions, vary widely.

Most private student loans, whether for graduate or undergraduate students, work in a very similar way to any type of private loan. The lender will typically conduct a credit and income review and assess your ability to repay the loan before giving you approval and setting the interest rate.

Many undergraduates and some graduate students need a cosigner to help them secure a private loan, or at least favorable interest rates, due to their lack of income and credit history. Some private lenders also offer loans for parents to pay for their children’s college education. Under these loans, the parent or guardian, rather than the student, is usually legally responsible for repayment.

Costs of Private Student Loans

Private student loans may offer fixed and/or variable interest rates, and there’s not much difference in this regard when it comes to student loans vs. personal loans. In most cases, the interest rates depend on the borrower’s credit score and the credit score of the cosigner, if any. This means you’ll secure a lower interest rate and pay less over the life of the loan if you have a strong credit history, or can find a co-signer with excellent credit.

Furthermore, while some lenders offer fixed interest rates, these are often only available with a shorter repayment term. Most private student loans offer zero fees, as they build the loan fees into the interest rate.

Repayment Private vs Federal Student Loans

Private student loans generally offer more limited repayment plans than federal loans. Some private student loans offer a choice of repayment options, but generally, charge a higher interest rate for longer repayment terms.

Most private student loans are not included in loan forgiveness programs. Neither were they included in the COVID-19 student loan forbearance, so there’s a fair chance they won’t be covered by any future forbearance programs. This could be an issuer for borrowers under stress, as most private student loans are in default 30 days after a missed payment, compared to 270 days of nonpayment for federal loans.

Cost of Student Loans: Private vs. Federal

Overall, federal student loans are less expensive than private student loans. Private student loans may be less expensive for some borrowers if the borrower (or cosigner) has excellent credit or if the borrower pays off a variable-rate loan before interest rates rise too much. But, federal student loans also offer superior repayment benefits that are not available to borrowers of private student loans.

During deferments and forbearances, unpaid interest continues to accrue and will be capitalized by adding it to the loan balance. Interest capitalization on Federal Direct Loans occurs once, at the end of the forbearance or deferment period (that is, when loan status changes). Interest capitalization on private student loans may be more frequent, for some loans as frequent as monthly. Interest capitalization causes interest to be charged on interest, increasing the cost of the loan slightly.

Here’s an overview of the costs of federal student loans compared to private loans, for a loan of $57,500 to an undergraduate student:

	Federal student loans (Direct subsidized or unsubsidized student loan)	Private student loans
Initial cost (loan origination fee)	$608.93	$0
Average interest rates	4.99%	9.43%
Cost 1 year after graduation	$59,066	$60,479.20
Cost 3 years after graduation	$62,030.46	$66,240.51
Cost 5 years after graduation	$65,089.87	$72,338.48
Cost 10 years after graduation	$73,151.33	$89,020.40

This loan amount is based on the maximum total loan allowed to undergraduate students for direct subsidized (Stafford) federal loans. The interest rates are based on the official federal rate for Stafford loans disbursed between October 1 2020 and September 30 2023, and the average variable APR across our featured private student loan providers.

You can also use our Loan Comparison Calculator to compare the cost of multiple loans.

Future Safety Net for Struggling Borrowers

If a borrower runs into financial difficulty, there generally are more safety nets for federal student loans than for private student loans.

Both federal student loans and private student loans offer temporary suspensions of the repayment obligation, called deferments and forbearances. But, the deferments and forbearances are longer for federal student loans, up to 3 years in total duration, compared with just one year for private student loans. Private student loans may require the borrower to make interest-only payments during a partial forbearance, to prevent the loan from getting larger.

All federal student loans offer death and disability discharges. About half of private student loans offer similar discharges. Federal student loans also offer closed school discharges and false certification discharges, which are not available on private student loans.

Federal student loans offer income-driven repayment plans, while commercial private student loans do not. An income-driven repayment plan bases the monthly payment on the borrower’s income, as opposed to the loan balance, yielding a lower monthly loan payment. The remaining debt is forgiven after 20 or 25 years in repayment (10 years for public service loan forgiveness).

Both federal student loans and private student loans are almost impossible to discharge in bankruptcy. It might be slightly easier for a borrower to get a private student loan discharged in bankruptcy since private student loans do not offer as many safety nets as federal student loans

Forbearance, Forgiveness and Discharge of Student Loans

Borrowers may be able to obtain forbearance for their student loans to allow them to temporarily reduce or postpone payments. Forbearance limits for federal loans are 3 years while private lenders usually enforce a 1-year limit.

Borrowers with federal student loans may apply for loan forgiveness. In addition to the Teacher Loan Forgiveness Program, the federal government sponsors the Public Service Loan Forgiveness Program, which allows borrowers to apply for loan forgiveness if they:

Work full-time for a government or non-profit organization
Repay their Federal Direct loans in an income-driven repayment plan
Make 120 qualifying payments

Loan forgiveness is generally not available for private student loans. However, private loan borrowers may be eligible for repayment assistance through grant programs sponsored by state or local governments.

Federal student loans are discharged due to the death or total disability of the student. And Federal Parent PLUS Loans are discharged if the parent or student dies. Federal Parent PLUS Loans are also discharged if the parent becomes totally disabled, but not if the student whom the loan benefits are the one that is disabled.

Most private lenders also discharge student loans due to death or total disability. But, each lender establishes its own criteria for the discharges, such as what types of disabilities qualify for a disability discharge.

	Federal Direct Stafford	Federal Direct PLUS	Private Loans
Forbearance Limits	3 years	3 years	1 year
Loan Forgiveness	Yes	Yes	No
Death Discharge	Yes	Yes	Varies by lender
Disability Discharge	Yes	Yes	Varies by lender

Which Type of Student Loan Is Right for You?

With fixed low-interest rates, flexible repayment options, and plenty of built-in safety nets, plus being easier to get in general, federal student loans may seem like the obvious choice. Certainly, they are often the best choice for undergraduate students, offering lower interest rates and more favorable loan terms.

However, graduate students with good credit may find that private loans are a better option than the federal loans (that is grad PLUS loans) available to them. Equally, parents taking out a loan to cover their child’s education may find that they’re able to secure more favorable terms with a private lender compared to a PLUS loan.

If you don’t qualify for a federal student loan, whether because you’ve reached the aggregate limit or for some other reason, a private loan could be your only option. It can also be a way to cover additional expenses if your federal loan doesn’t cover all of your college costs.

Eligibility Requirements Private and Federal Student Loans

The main impact of differences in eligibility for federal student loans and private student loans is that borrowers are sometimes forced to borrow from private student loans after reaching the federal student loan limits.

Federal student loans require all borrowers to file the Free Application for Federal Student Aid (FAFSA). This determines how much of a student’s Federal Stafford loan eligibility is subsidized and how much is unsubsidized. Eligibility for the subsidized Federal Stafford loan depends on financial need. Eligibility for federal student loans does not depend on the borrower’s credit scores or credit history and cosigners are not required.

Eligibility for private student loans does not depend on the FAFSA, but it does depend on the credit scores of the borrower and cosigner. More than 90% of private student loans to undergraduate students require a creditworthy cosigner. Private student loans may also depend on debt-service-to-income ratios and minimum income thresholds.

The Bottom Line

It’s important to be cautious before taking out any loan and make sure you don’t overextend yourself beyond your future earning potential. When comparing federal vs. private student loans, federal loans have low, fixed interest rates, more flexible repayment options, and more consumer protections. However, even these kinds of loans can be a huge burden later in life if your student debt is simply too high.

Try to avoid relying on loans too much to fund your college education. Ideally, you should aim to pay for your education through a combination of different sources, such as financial aid, work, and savings such as 529 savings plans.

Frequently Asked Questions (FAQs)

Are private student loan interest rates higher than federal ones?

This depends largely on your credit history and to some extent your income. Private lenders will set an interest rate based on these two factors, so the private student loan interest rates available to you may be lower or higher than the federal student loan fixed rate. Having said that, if you are an undergraduate student with little to no income or credit history, it’s very likely that the federal interest rate will be lower for you.

What are three advantages of federal student loans over private?

The first advantage of federal loans is that their fixed interest rate is lower than the rates available to most undergraduate students with a short credit history. Secondly, they offer a range of repayment options as well as consumer protections to make it as easy as possible to repay your loan without coming under financial stress. Finally, most students will find it relatively easy to get approved for some kind of federal student loan regardless of their credit history, financial need, or whether they’re undergraduate or graduate student.

Can private student loans be forgiven?

Some private student loans can be forgiven, but this is rare as most are not eligible for loan forgiveness schemes. On the other hand, all federal student loans are subject to loan forgiveness if you meet certain conditions, such as working in a public service job for 10 years.

Are federal or private student loans better?

This will depend on your individual situation, as federal student loans are better for some people, while private student loans could be more advantageous for others. Most undergraduate students with no credit will find that federal loans offer better interest rates and loan terms, while graduate students and parents with a good credit history may find that private student loans are better for them.

How do you apply for a federal student loan?

The first step to applying for any federal student loan is to submit the Free Application for Federal Student Aid (FAFSA). This form covers a range of information, mostly around the student’s income and assets, as well as their parents’ income and assets, if the case of dependent students. Based on this, you’ll receive an offer for financial aid, including any federal loans that you’re eligible for.