Federal vs. Private Student Loans: What You Need to Know

·8 min read

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Paying for a college degree can be an expensive venture, often requiring a combination of scholarships, grants, and student loans to cover the cost.

When it comes to student loans, you have two main options to choose from: federal and private. Each type of loan has its pros and cons, so which you choose will depend on your unique financial circumstances.

Read on for everything you need to know about federal and private student loans, and what to keep in mind along the way.

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Understand the differences between federal and private student loans

If you need to borrow money to pay for college, both federal and private student loans can help you. However, there are a few important differences between the two types of loans.

Federal student loans

Federal student loans are government-backed loans provided to students and/or parents seeking an undergraduate, graduate, or professional degree. These loans can be subsidized — meaning the federal government covers the interest payments while you’re still in school, if you demonstrate financial need — or unsubsidized, and require you to fill out a FAFSA (or Free Application for Federal Student Aid) in order to apply.

The interest rate on federal student loans is fixed and is typically lower than rates on private student loans. In addition, your federal loans can be consolidated into one loan later on. You may be eligible for income-based repayment plans with federal student loans, as well as loan forgiveness programs if you work in public service..

In general, it’s best to apply for federal student loans first. Once you’ve exhausted your federal student loans, you can apply for private student loans to cover any financial gaps in your education costs.

Private student loans

Private lenders, such as banks or credit unions, offer private student loans. These loans require a credit check, which will take your credit scores and history into account. This means that you may need to add a parent or other qualified cosigner in order to qualify for the loan. However, most lenders provide options for releasing the cosigner down the line.

Private student loans can have either fixed or variable interest rates and offer a variety of repayment plans, depending on the lender. You can’t get loan forgiveness or income-driven repayment benefits for private loans.

Types of federal student loans

Three different types of federal student loans are available to help you pay for your education, depending on your eligibility: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS loans.

  • Direct Subsidized Loans These federal loans are intended for undergraduate students who demonstrate financial need. The federal government pays the interest on these loans while you’re in school at least half-time, and for the first six months after you leave school, making them the less expensive federal loan option.

  • Direct Unsubsidized Loans — Undergraduate or graduate students can apply for these loans . You don’t need to prove financial need to qualify for these loans. You must pay the interest on Direct Unsubsidized Loans.

  • Direct PLUS Loans Graduate or professional students can apply for these loans , while parents can apply for Parent PLUS Loans. You’ll need to submit to a credit check when applying for Direct PLUS or Parent PLUS Loans.

In order to take out a federal student loan, you’ll need to fill out a FAFSA for each year that you would like financial aid.

Pros and cons of federal student loans

Once you’ve exhausted your free tuition options, such as scholarships and grants, federal student loans are usually the next best place to look (especially before considering private student loans). However, there are both pros and cons to keep in mind when taking out this government-backed funding.


  • No cosigner required — You generally don’t need a cosigner to get federal student loans.

  • Subsidized loans are available — If you demonstrate financial need, the government covers your interest while you’re in school and during grace periods.

  • Repayment benefits — Loan forgiveness programs and income-driven repayment plans are available if you take out federal student loans.

  • No credit check — Loan approval isn’t based on credit history (with the exception of Direct PLUS loans).


  • Borrowing limits — Federal loan caps limit how much you can take out for school.

  • FAFSA required — You’ll need to fill out a FAFSA each year that you need aid.

  • Origination fees — Federal student loans have origination fees, which means the amount you receive could be lower than the loan you accept.

  • Consolidation affects your interest rate — You can consolidate your loans later on, but the interest rate will be determined by averaging each of the loans’ existing rates.

Types of private student loans

Whether you’ve hit the borrowing limit on federal student loan funding, don’t qualify for need-based funding, or didn’t fill out a FAFSA in time, you may be considering private student loans. These loans work a bit differently than federal loans, so you’ll want to fully understand how they work before applying.

Banks, credit unions, or other financial institutions offer these loans — not the federal government.

Private student loans may have fixed or variable interest rates. A credit check is required. This will determine whether or not you qualify, as well as the rate and other terms you’re offered. In many cases, students need to add a creditworthy cosigner in order to take out a private loan, though this cosigner can usually be released after a certain number of timely payments.

The repayment plans offered for private student loans can also vary, depending on the type of loan and lender you choose. These options might include deferred repayment (until after graduation), interest-only payments while you’re in school, or even partial repayment (usually a flat rate per month) until you graduate.

With Credible, you can easily compare rates on student loans from various lenders.

Pros and cons of private student loans

In general, you’ll only want to consider private student loans if scholarships, grants, and federal student loans won’t cover the amount you need to borrow for school. However, if you still need (or want) to take out private student loans, you should consider a number of pros and cons.


  • Higher loan maximums — You can generally apply for a larger loan with a private lender.

  • Not required to prove financial need — You won’t need to demonstrate financial need, and a FAFSA isn’t required.

  • Can apply at any time — If you miss federal student loan deadlines, you can still apply for private student loans at any point. This is also helpful if you run out of money mid-semester.


  • Credit check required — Your application is based on your credit scores and history, which can be tough if you’re a young adult without a credit card.

  • A cosigner is usually required — Many private lenders will only approve you for a student loan if you have a qualified cosigner.

  • No repayment benefits — Unlike federal student loans, private student loans don’t have benefits like loan forgiveness or income-based repayment options.

How to apply for federal student loans

The process for applying for and receiving federal student loans is different from the process for private student loans. You’ll need to follow the steps below to get federal loans.

  • Submit your FAFSA. The first step to taking out a federal student loan is to fill out the FAFSA. This application will determine whether you qualify for need-based loans and how much you can borrow.

  • Receive an aid offer from your school. Based on the results of your FAFSA and your school’s cost of attendance, you’ll get an official aid offer from your chosen school(s). This may include federal student loans.

  • Complete entrance counseling. Before you can accept federal student loans, you’ll need to go through an entrance counseling process. This ensures you understand your loan, the repayment terms, and the costs involved.

  • Sign your promissory note. You’ll be required to sign a Master Promissory Note for your new federal student loans. This is essentially a contract outlining the loan amount, repayment terms, origination fees, and interest rate for your loans.

How to apply for private student loans

The process for obtaining private student loans typically looks like this:

  • Shop around for lenders. Since a multitude of lenders offer private student loans , you’ll want to shop around first to find the best options.

  • Apply for your loan. Once you’ve found a lender and rate that suits you, it’s time to apply. You’ll need to have your personal and financial information handy (as well as that of any cosigners).

  • Accept your loan. The lender will conduct a credit check , and may decide to approve your loan. If you’re happy with the rate and terms, you can accept the loan.

  • Sign your required documents. Your lender will require you to sign certain documents agreeing to the loan terms and repayment. After you sign these forms, the lender will schedule your funds for disbursement to you or your school.

Ready to shop around for private student loans? Check out Credible to compare rates from multiple lenders.

About the author: Stephanie Colestock is a Washington, D.C.-based writer who has more than 10 years of experience in writing about investing, business, and personal finances. She’s contributed to outlets such as Yahoo! Finance, MSN, Investopedia, Credit Karma, Credible, and more. She holds a bachelor’s degree from Baylor University and is in the process of earning her CFP® certification.

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