How do private and federal student loans differ?

Over 44 million Americans deal with student loan debt. With America’s rising tuition costs, it feels nearly impossible to pay for college without taking out a student loan.


Despite the growing costs and debt size, we continue to see degree holders thrive in the job market. Therefore, the need to attend college is not going away anytime soon.

The question is, should you take out a private student loan or a federal one to pay for it? How do these types of student loans differ?

What’s the Difference?

Both options provide financial aid to cover the massive expenses that go hand-in-hand with post-secondary education. From tuition costs to everyday living expenses, commuting, rent, textbooks, and everything in between, obtaining financial aid may be a deciding factor when you’re considering college.

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Federal loans

Federal student loans are made by the government. These loans come with terms and conditions that are set by the law in order to protect both parties, and they include benefits that are not offered through private loans (Federal Student Aid). For example, payments are not due until after you graduate, change your enrollment status to less than half-time, or leave school. Not to mention, there are zero penalties for prepaying. If needed, loans may even be consolidated into a Direct Consolidation Loan.

Need more information on loan whether or not you should consolidate your student loans? Check this out. To apply for a federal student loan, you must first complete the Free Application for Federal Student Aid (FAFSA) form.

Benefits of federal student loans:

Fixed Interest Rates – Interest rates are fixed and typically lower than private loans. You can check on the current interest rates on federal student loans, here.

Postponing Payments – If you are finding difficulty in repaying your loan, there may be an option to temporarily lower or postpone payments. Read more about this method here.

Income-Driven Repayment Plans – There are many repayment plan options, but one of the most beneficial plans is the ability to tie your monthly payment directly to your income.

Free Application – File the FAFSA for free.

No Credit Check Necessary – You don’t need a credit check to qualify (discluding PLUS loans).

Tax Benefits – The interest costs may be tax-deductible.

Subsidized Loan – If there is the right financial need, you may qualify for a loan where the government pays the interest while you’re in school.  

Student Loan Forgiveness – It’s possible to have a portion of your loans forgiven, as long as you qualify for it. Learn more about Student Loan Forgiveness.

Visit the Federal Student Aid for more details about the benefits of Federal Student Loans.

Private loans

Private student loans are often made by private organizations: credit unions, state-based or state-affiliated organizations, and banks. Their terms and conditions are set by each individual lender and can be less or more expensive than federal student loans. Private loans will differ by the loan and lender, so do your research to make sure you fully comprehend the terms of the loan. These loans typically require a credit record or cosigner (i.e. a parent).

Many private lenders require payments while you are still in school, but these may be deferrable. Interest rates depend on the terms and conditions set by the organization, which means they could be fixed or variable – they may be higher or lower than federal student loan interest rates, depending on your situation. 

It’s important to be wary of a private lender that has zero restrictions or criteria. For example, you should probably avoid a lender who is willing to sign off on a six-figure loan without verifying your value as a recipient.

Each servicer will have different requirements, so it’s important to shop around to locate the best one for you. Don’t be afraid to ask your lender any questions for clarification.

Benefits of private student loans:

Tax Benefits – The interest costs may be tax deductible.

Refinancing – You can refinance in the future with a private consolidation loan.

Cosigner Option – If you don’t have a credit record, you can cosign a private student loan with a parent or guardian.

No FAFSA Required – You don’t need to fill out the Free Application for Federal Student Aid form, which is necessary for Federal Student Loans.

Repayment Plans – Usually, there is more than one repayment plan option available. Pick a repayment plan that works for you and the lender.

Interest Rate Discounts – You may qualify for interest rate discounts.

For more information on Private Students Loans and Federal Student Loans, read How To Get A Student Loan.

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