What are the differences between private and federal student loans?

Both federal and private student loans can help students pay for college. Since loans need to be paid back to the lender (in most cases), it’s essential to carefully understand and weigh your options to help yourself make smart choices about what loans to apply for to help pay for school, if any. After all, student loans are something you might find yourself dealing with financially for many years.

Continue reading to learn more about some key differences between these two types of loans.

What are federal student loans?

The U.S. Department of Education provides federal student loans, though schools distribute the loan funds. 

To determine your eligibility for federal student loans, you must file the Free Application for Federal Student Aid (FAFSA^®). On your FAFSA^®, you’ll indicate the schools to which you’d like to make your information available. From there, the schools you’re accepted to (or the school you’re actively enrolled in) will send you aid award letters outlining what aid they can provide you, if any — including federal student loans. 

The U.S. Department of Education offers four types of loans to help students pay their college and university tuition and other approved school-related expenses.

The four types of loans are:

• Direct Subsidized Loans: Also known as Subsidized Stafford Loans, these are for eligible undergraduate students with demonstrated financial need. The federal government pays the interest on these loans while you’re in school at least half-time, for the first six months after you leave school, or during a period of deferment wherein your loan payments are postponed.
• Direct Unsubsidized Loans: These loans are available for eligible undergraduate, graduate, and professional students. It isn’t necessary to demonstrate financial need, and the student is fully responsible for the interest payments that these loans incur during any period, including if they’re in deferment or forbearance.
• Direct PLUS Loans: This loan program is for undergraduate students, graduate or professional students, and parents of dependent undergraduate students. A credit check is required for these loans and eligibility is not based on financial need.
• Direct Consolidation Loans: This loan consolidates your eligible existing federal loans into a single loan with one monthly payment and servicer.

What are private student loans?

Private loans are granted by banks, credit unions, and other organizations and have terms and conditions set by the lender.

Not all private loans are the same, as they vary based on the lender and the type of loan. Make sure to read and understand the terms and conditions of your private student loan before accepting the loan. Reach out to the lender if you have any questions, too.

Keep in mind that private student loans have their own applications and are not related to the FAFSA^®.

Differences between private and federal student loans

Private and federal student loans are not the same. Keep reading to understand some of the differences and why it’s often recommended to fill out the FAFSA^® to determine your eligibility for federal student loans before utilizing private student loans to help cover the costs of your schooling.

When repayment begins

• Federal student loans: You’re not required to make payments on these loans until after you graduate, leave school, or drop your enrollment status to less than half-time. Keep in mind that depending on the type of loan, interest may accrue during periods when the loan is not actively being paid.
• Private student loans: Some private student loans require payments while you’re still in school, but others allow you to defer (put off) payments until after you graduate or leave school.

If you need a cosigner

• Federal student loans: To receive most federal student loans, you don’t need a cosigner. However PLUS loans do allow a cosigner.
• Private student loans: This type of loan may be available without a cosigner, depending on your creditworthiness. That being said, if you don’t have an established credit history or if you have an adverse credit history, you might need a cosigner to receive a private student loan. A cosigner is someone such as a parent or relative who agrees to share the responsibility of repaying the loan in case you’re not able to make payments. The cosigner should ideally have a strong credit history to support the loan application.

The borrowing limits

• Federal student loans: As of January 2024, for undergraduate dependent students (not including students whose parents can obtain PLUS loans), the total limit on funds they may be able to receive for their undergraduate schooling is $31,000. No more than $23,000 of this amount may be in subsidized loans. For independent undergraduate students, the total limit is $57,500 for their undergraduate schooling, and no more than $23,000 may be in subsidized loans. For graduate or professional students, the limit is $138,500, and no more than $65,500 can be in subsidized loans (this aggregate limit includes loans received for undergraduate study). Of note, the aggregate limit is based on unpaid balances of loans and doesn’t include paid balances. This might be especially relevant to grad students who may have paid down some of their undergraduate student loans before applying for loans for graduate school.
• Private student loans: These loans may have higher borrowing limits. However, some lenders may only allow students to borrow the amount they need to cover the cost of attendance and not any additional needs like textbooks or room and board.

The loan’s interest rate

• Federal student loans: Interest rates for federal loans are fixed and determined by Congress each year and can be lower than private loans. Below are the fixed interest rates for federal Direct loans first disbursed on or after July 1, 2023, and before July 1, 2024.
  • Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduate borrowers: 5.50%
  • Direct Unsubsidized Loans for graduate or professional students: 7.05%
  • Direct PLUS loans for parents and graduate or professional students: 8.05%
• Private student loans: Depending on the loan, private student loans can have variable or fixed interest rates. Depending on your circumstances and the lender, these interest rates may be higher or lower than the federal student loan interest rates.

Whether the loan requires a credit check

• Federal student loans: You won’t undergo a credit check as part of the FAFSA^® application to qualify for most federal student loans. The exception is PLUS loans. When it comes to PLUS loans, if you have an adverse credit history, you may still be eligible for this type of loan, but you may need to meet additional requirements to qualify for it.
• Private student loans: These loans require a credit check in most cases and often require an established credit history or a cosigner to qualify.

Repayment options and loan forgiveness

• Federal student loans: Federal student loans that have entered repayment can come with flexible repayment options (like repayment plans that are based on income) and loan forgiveness opportunities, depending on your situation.
• Private student loans: Private student loans tend to have more limited repayment and loan forgiveness options. However, it’s important to check with your lender to see what options may be available.

Final thoughts

If you’re eligible for federal student loans, they may come with advantages over private student loans. That being said, there may be circumstances where you’ll need to explore taking out private student loans to close gaps when it comes to paying for your education. It’s important to understand both federal and private student loans and their similarities and differences for this reason.