Comparing Federal and Private Student Loans

Federal vs. Private Student Loans—What’s Right for You?

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As college costs keep rising, many students continue to need help paying for college.

Tuition at a four-year public school is about 10% more than in 2010, according to the National Center for Education Statistics. According to the Federal Reserve, four out of ten adults that attended college accrued some debt to cover their education costs, with student loans being the most common type of debt used to pay for college.

When deciding how to pay for higher education, there’s a reasonable chance that you will have to get student loans. Understanding how to choose between federal and private student loans—and when you might use both—can help you make the right decision for your long-term education and financial goals.

Key Takeaways

  • Carefully consider your options and weigh the pros and cons of federal and private student loans. Take into account your situation, and the potential protections and benefits available from different loan options.
  • Federal student loans offer fixed rates, don't require you to have a credit history, and have flexible repayment plans. However, there are limits on how much you can borrow and have subsidized.
  • On the other hand, private student loans have higher limits and have the potential for a lower interest rate if you have good credit. But, not everyone qualifies for private student loans and your interest rate could rise as the market changes.

Federal vs. Private Student Loans

As you might expect, federal student loans are offered by the U.S. government, while private student loans originate from lenders in the private sector. While the government chooses others, called servicers, to administer the terms of the loans, the government still originates the loans and sets the terms. 

The table below can help you compare some of the characteristics of federal undergraduate student loans with those of private undergraduate student loans. 

Federal Student Loans Private Student Loans
Loan limits   Undergrads: $5,500–$7,500 annually, depending on the year in school.  Up to 100% of the cost of college tuition and living expenses  
Interest rate 4.99% for undergraduates. 6.54% for grads and professionals. Variable rates as low as 2.49%
Credit requirements No, for most Yes
Subsidized options Yes No
Income-driven repayment options Yes No
Forgiveness options for those who qualify Yes No

With federal student loans, the terms are uniform and apply to everyone receiving them. Private loans, though, have varying terms and criteria, based on individual lenders as well as the circumstances of the borrower.


Federal student loans have a fixed interest rate, so you know that the loan you receive each year has a set rate, no matter what happens in the market. 

Benefits of Federal Student Loans

That rate is determined by a formula set forth in federal law and changes once a year. Borrowers don’t have to worry about meeting credit requirements or having a loan application rejected.

Additionally, those who meet certain criteria might also be eligible for subsidized student loans. With subsidized loans, the government covers the cost of your interest while you attend school. This can potentially save you hundreds—or even thousands—of dollars when you graduate. 

With unsubsidized loans, interest begins accruing the day the loan is disbursed. If you don’t make interest payments while you’re in school, all of that interest is added to your loan balance when it’s time for you to start repayment.

On top of providing stability and potential subsidies, federal student loans often come with flexible repayment options. It’s possible to enter an income-driven repayment plan, which sets your monthly payments based on your income, allowing you to remain current, even if you’re unable to afford your original payment.

Finally, there are a number of federal student loan options that can forgive a portion of your student loan balance.

Pros of Federal Loans
  • Fixed interest rate, no matter what your credit rating

  • No need for a credit check (or co-signer)

  • Flexible repayment options

  • Ability to qualify for potential loan forgiveness

Cons of Federal Loans
  • No way to get a lower interest rate based on your credit score

  • Lower loan limits

  • Caps on subsidized loan amounts

  • Income-driven repayment can result in being in debt longer

Benefits of Private Student Loans

Because private student loans are offered by banks, credit unions, and even state-based programs, they have different criteria. One of the benefits, though, is that you might be able to qualify for a higher loan amount than the limits imposed by federal loans.

For example, lender SoFi promises to cover up to 100% of the school-certified cost of attendance (although you need to borrow at least $5,000).

Additionally, with private student loans, there’s a chance that you might be able to get a lower interest rate if you have good credit.


Even if you don’t have enough credit history to qualify for a lower rate (or a higher loan amount), you might be able to get a good deal on a loan if you have a co-signer who meets the criteria set by the lender.

Finally, some lenders offer various perks and benefits that might help you, depending on your situation. For example, CommonBond offers a forbearance program if you can’t make your payments, and SoFi offers access to additional services, like career coaching.

Pros of Private Student Loans
  • Potential for lower interest rates with good credit

  • Higher loan limits

  • Access to additional programs and services

Cons of Private Student Loans
  • Fewer repayment options

  • Variable interest rates could rise with market changes

  • Potential to be rejected

  • No subsidies available

  • No forgiveness programs

How to Decide Between Federal and Private Student Loans

For many students, it’s not actually a matter of choosing between federal and private student loans. Instead, there’s a good chance that you might need to use both types of loans to cover your college costs. 

Consider starting with applying for federal student loans. If you qualify for subsidized student loans, those can save you a great deal of money in the long run. Next, max out your unsubsidized loan eligibility. You might still be experiencing a college funding gap after reaching the federal loan limit.

Private student loans can help fill that gap. However, it’s important to realize that you might need a cosigner if you don’t have an established credit history, and it’s vital to review the terms of the loan to see if they will fit your needs. Federal student loans come with extra protections and options, so it makes a lot of sense to focus on those first and supplement with private student loans if needed.

When to Focus on Private Student Loans First

There are times when it can make sense to choose private student loans without getting federal loans first. For the most part, though, that applies when you have excellent credit and you qualify for an interest rate that is lower than the current rate on federal loans—or you have a cosigner with excellent credit willing to help you out.

If this is the case, see if you can get a fixed rate on your loan, and double-check to make sure you can put off payments until you finish school. Also, find out if there are hardship and deferment options, just in case you run into financial trouble after you graduate.

Frequently Asked Questions (FAQs)

What are some advantages of federal student loans?

Two advantages of federal student loans are they have fixed interest rates despite your credit score and flexible repayment options that can be based on your income levels.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. National Center for Education Statistics. "Tuition Costs of Colleges and Universities."

  2. Federal Reserve. "Report on the Economic Well-Being of U.S. Households in 2021."

  3. Federal Student Aid. "Subsidized and Unsubsidized Loans."

  4. SoFi. "Private Student Loans."

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