Seven Differences Between Federal and Private Loans

Seven Differences Between Federal and Private Loans

Rob Wilson /

Note: This post was submitted to Student Caffé by Brianna McGurran. Brianna is a freelance writer and teacher based in Brooklyn, New York. Previously, she was a writer and spokesperson at the personal finance website NerdWallet, where she wrote "Ask Brianna," a financial advice column syndicated by the Associated Press, and appeared as an expert guest on ABC World News Tonight and the Today Show. We would like to thank her for her submission and credit her as the author of this blog post.

Paying for college can feel like making a patchwork quilt: You take out a loan here, pull from some savings there, and hope it all ties together. But there are crucial differences between the various ways to cover college costs, and they’ll affect how much financial flexibility you’ll have when you graduate.

Take a strategic approach by borrowing federal loans up to the maximum allowed first, and only then turn to private loans afterward. Here are the main differences between the two loan types, and why federal loans are the safer bet to start with.

1. Most federal loans don’t require a credit check.

Any student enrolled at least half time in a participating school can get a federal student loan. You don’t need to have a certain credit score or use a cosigner to be eligible unless you’re a graduate student or parent applying for a federal PLUS loan. In those cases, the government will check your credit, but you may still be able to get a loan using a cosigner or after explaining the circumstances of your credit history.

Private student loans, on the other hand, are credit based. That means you or a cosigner must meet certain requirements to receive one. The better your credit score, the more loan options you’ll have and the lower your interest rates will likely be.

2. Private loans offer variable interest rates, not just fixed rates.

Banks, credit unions, and online lenders offer private student loans, and you’ll often have the option to choose either a fixed or a variable interest rate when you receive one. Fixed rates don’t change over time, while variable rates may go up or down depending on the economic environment.

Federal student loans used to have a variable option; however, they now come with fixed rates only, which are set by Congress each year.

3. You must submit the FAFSA to get a federal loan.

To apply for a federal student loan, complete the Free Application for Federal Student Aid, known as the FAFSA. The application period opens October 1 annually for the following school year.

The FAFSA makes it possible to get not only federal student loans but also free money like federal grants and scholarships from individual colleges. You can also find independent scholarships like the one Student Loan Hero offers. Fill out the FAFSA as early as possible to qualify for first-come, first-served funding opportunities like work-study programs.

Private student loans, on the other hand, require an application through the lender, which will include a credit check. The FAFSA won’t help you at all.

4. Some federal student loans are subsidized.

The federal government’s Direct Loan Program includes two types of loans: subsidized and unsubsidized. While anyone can get an unsubsidized loan, only students with financial need can qualify for subsidized loans.

With subsidized loans, the government pays the interest while you’re in school, during your post-graduation grace period, and anytime you defer (or pause) payments due to financial concerns. Those subsidies can save a substantial amount in interest over time.

Private student loans generally do not come with interest subsidies. If you’re having trouble making payments, though, you can contact the lender and ask about reducing your interest rate or paying interest only for a period of time.

5. Most federal loans have borrowing limits.

Undergraduate students can borrow a maximum of $5,500 to $12,500 in federal loans per year, depending on whether they’re considered an independent or dependent student, and how long they’ve been in school.

Graduate students can borrow up to $20,500 per year, while parents can borrow PLUS loans up to the entire cost of attendance at their child’s school, after subtracting any other financial aid the student receives.

Private loans don’t have the same limits. Many will cover up to your cost of attendance, after accounting for other financial aid, just as federal PLUS loans do. That means they’re an option for filling any gaps in your college costs, once you’ve borrowed the maximum in federal loans (and, of course, after you’ve received any grants, scholarships, and work-study hours you qualify for).

6. Private loans may offer additional discounts in repayment.

Most student loans, both federal and private, come with a 0.25% interest rate discount if you sign up for automatic monthly payments from your bank account. That will also help you stay on top of bills without needing to set tons of calendar reminders.

But some private lenders offer other ways to save. For example, your private lender might give you an additional discount for having an affiliated bank account with them.

7. Federal loans have more flexible repayment and forgiveness options.

One of the most worthwhile benefits of federal loans is their flexibility in repayment. If you can’t afford your loans after leaving school, you can opt for a federal income-driven repayment plan, which will tie your monthly bill to your earnings. You could pay $0 if your income is low enough. Plus, your loan balance will be forgiven after 20 or 25 years of payments, depending on the plan.

Federal loans also provide generous periods of deferment and forbearance, which are ways to postpone payments if you need a short period of relief. And they have some popular forgiveness options, such as Public Service Loan Forgiveness, which can wipe away the remaining debt of public service workers after 120 on-time monthly payments.

Private loans generally don’t have comparable forgiveness programs, although some lenders do provide alternative payment plans that can help if you’re at risk of falling behind. Read your loan agreement carefully to understand all the repayment options available, and what recourse you have if life gets in the way of paying your student loan bills on time.

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