When it comes to student loans, you have two main options: federal or private. Federal student loans are by far the most common, making up approximately 92% of the student loan market.
However, private student loans can play an important role in completing your education. Depending on your education plans and credit, private loans could be more cost-effective than federal loans.
In this breakdown of federal vs. private student loans, learn about these different loan options and what factors differentiate them from one another.
What Are Federal Student Loans?
As the name implies, federal student loans come from the federal government. The U.S. Department of Education acts as your lender, and third-party companies — known as loan servicers — manage the loans and their repayment.
For students and their families, there are four types of federal loans:
- Direct Subsidized Loans: These loans are awarded based on financial need to undergraduate students. The government pays the interest that accrues while you’re in school, during your loan grace period, and during any periods of deferment.
- Direct Unsubsidized Loans: Direct Unsubsidized loans can be used to pay for undergraduate or graduate programs. The student is responsible for all interest that accrues.
- Parent PLUS Loans: Parent PLUS loans are for parents who want to borrow money to pay for a child’s undergraduate education.
- Grad PLUS Loans: Grad PLUS loans are for graduate and professional students.
- Direct Consolidation Loans: After leaving school, borrowers can consolidate their loans into one loan to simplify their debt payments.
The standard repayment plan for typical federal loans is ten years with fixed monthly payments, and all loans have fixed interest rates that stay the same for the duration of the loan.
What Are Private Student Loans?
While federal loans come from the government, private loans are available through banks, credit unions and financial institutions. Because they’re issued by individual lenders, rates and terms can vary.
There are private loan options for undergraduate students, graduate students, and parents. They can have fixed or variable rates; variable rates often start low but can change over time. And while federal loans typically have 10-year standard repayment terms, private loans can have terms ranging between five and 15 years.
Comparing Federal and Private Student Loans
Federal loans differ from private student loans in several key ways:
1. Rates and Fees
Federal loans always have fixed interest rates, and the rates apply to all borrowers regardless of credit or income. Federal loans also have disbursement fees, which are deducted at the time the loan is disbursed.
Private loans rarely have disbursement fees, and the rates can be fixed or variable. Private student loans are usually credit-based, so you may qualify for a lower rate if you have good credit.
2. Eligibility Requirements
For federal loans, any college student can qualify if they’re U.S. citizens or eligible non-citizens, attend an eligible school, and complete the Free Application for Federal Student Aid (FAFSA). You cannot be excluded based on your credit or income. However, for Parent PLUS Loans, parents cannot have an adverse event on their credit report. See the requirements for Parent PLUS Loans.
With private loans, you usually must meet the lender’s income and credit requirements — or have a creditworthy co-signer willing to apply with you.
Those ineligible for federal loans, such as international students, may qualify for private loans.
3. Borrowing Limits
Federal loans have strict borrowing limits based on the type of loan, your dependency status, and your year. For dependent undergraduate students (parents eligible for PLUS loans), the maximum ranges from $3,500 to $7,500 per year. For dependent undergraduate students (parents not eligible for PLUS loans) & independent undergrads, the maximum ranges from $3,500 to $12,500 per year.
Private loans usually have much higher maximums. You can often borrow up to 100% of the school-certified cost of attendance, minus any other financial aid.
4. Deferment
With federal loans, your payments are deferred while you’re in school and for six months after you leave school or graduate — your grace period.
With private loans, whether you have to make payments as a student depends on the lender and the repayment plan you choose. Some lenders allow you to defer your payments until after graduation, while others require in-school payments.
5. Repayment Options
Federal loans have more flexibility. You have the option of enrolling in an income-driven repayment plan that bases your payments on a percentage of your discretionary income, potentially slashing your payment amount today.*
With private loans, you must make payments according to your promissory agreement. If you’re unable to afford your payments, whether your payments can be adjusted will be dependent on your lender’s policies.
5. Loan Forgiveness Eligibility
Federal students are eligible for federal loan forgiveness programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. However, private student loans are not, so even if you work in public service or education, you aren’t eligible for loan forgiveness.
Additional Student Loan FAQs
Can you consolidate private student loans into federal?
Private student loans cannot be consolidated into federal loans; there is no way to convert private loans into federal loans or qualify for federal loan benefits.
Can you convert federal loans into private loans?
Federal loans can be converted into private loans through student loan refinancing. Once you refinance, your loan will be private, and you’ll no longer be eligible for federal benefits. However, it can be worthwhile to take advantage of lower rates.
Do I need good credit to qualify for private student loans?
In general, you’ll need good to excellent credit to qualify for a private student loan. If you don’t meet the lender’s eligibility requirements, you may need to consider applying with a cosigner.
