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Federal loans

Federal & Private Student Loans: Do You Know the Difference?

Updated 01/12/2021

As you’re preparing for college and looking for ways to cover your tuition, you’ll probably hear about federal student loans and private student loans quite a bit.


The biggest difference between the two is that the U.S. Department of Education offers federal student loans, while private student loans are dispersed through a private lender.


Both private and federal student loans have different eligibility criteria and application processes. It’s important to understand the differences between the two.


What Are Federal Student Loans?

Federal student loans are offered by the government and may have different requirements for qualification than private student loans.


Borrowers will start by filling out the Free Application for Federal Student Aid (FAFSA). Your FAFSA will be used to determine how much aid you qualify for.  Make sure to watch that deadline and make sure you are applying on time if loans are needed.

Important Considerations for Federal Student Loans:


  • Regulated interest rates:  In many cases, federal loans offer low, fixed interest rates.
  • No interest until graduation: If you qualify for direct subsidized loans, you won’t pay any interest on the loans until after graduation. The Department of Education will pay the interest for you if you’re enrolled in school at least part-time.  Unsubsidized loans, however, will build interest from the day funds are disbursed to a school.
  • Borrower protections:  Federal loans also come with certain borrower protections like income-driven repayment plans and loan forgiveness options.
  • Borrowing limits:  If you qualify for federal student loans, there is a limit on how much you can borrow. If you’re an undergraduate, the maximum amount you can borrow each year ranges from $5,500 to $12,500.
  • May not cover the full cost of college:  Because of the lending limits, many college students find that federal aid isn’t enough to cover the full cost of their college tuition.

Penalties for defaulting:  If you run into financial trouble and end up defaulting on your loans, the government can garnish your salary.

What Are Private Student Loans?

When you’ve exhausted your federal student loan options and you still need more money, private student loans can help fill the gap. If you choose to take out private student loans, you’ll apply through a bank, credit union, or online lender.

Your lender will run a credit check to determine whether you qualify. The interest rates and repayment terms you receive will largely depend on your credit score. If you have limited credit history, you might consider applying with a cosigner.


Important Considerations for Private Student Loans:


  • Borrow up to the total cost of your education:  You can access higher borrowing limits when you take out private student loans. For that reason, private student loans can help fill in the financial gaps left by federal student loans, helping you cover up to the total cost of your education (minus any financial aid you’ve received).
  • Flexibility to choose your lender:  When you take out private student loans, you can compare offers from multiple lenders and choose the rates and terms that are best for you.
  • Refinancing options:  Private student loans may offer refinancing options that may not be available with federal student loans.
  • Interest rates may fluctuate:  Private student loans may come with interest rates that may differ from those on federal student loans, depending on your credit score and financial history.
  • Lending decisions are based on credit history:  When you apply for private student loans, your lender will run a credit check. This may be impacted by a borrower’s credit history, or a cosigner’s credit history.
  • Variable interest rates may change over time:  Some private student loans come with variable interest rates, which means they will change periodically over the life of the loan.


Which is the Right Option for You?

If you’re looking for ways to pay for college, there is no one-size-fits-all solution. Both options can help you access the funding you need, and you’ll likely end up using a combination of both private and federal student loans to pay for school.


If you fill out the FAFSA and find that your federal aid doesn’t cover the full cost of your education, it makes sense to apply for private student loans. Here are a few questions you can ask yourself when you’re evaluating private lenders:


  • Are the interest rates fixed or variable?
  • Can you wait until graduation to begin repaying your loans?
  • Is there an origination fee or pre-payment penalty?
  • Does your lender offer any deferment options?