Comparing Federal and Private Student Loans

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.

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. 

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.

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.

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.

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.

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)