If you're looking for additional funds to pay for college, you may be looking at Federal vs. private student loans.
After you're admitted to college, you’ll receive a financial aid package that breaks down your cost of attendance minus any grants, scholarships, or other sources of financial aid you’re eligible for. This financial aid package includes federal student loans.
Many students choose to cover their college expenses with Federal student loans, but it's not the only way (or you may need to borrow more than Federal loans offer). You can also use private student loans. There are pros and cons to consider before going the private route, but it might be the right decision depending on your financial situation.
We explore the differences between federal vs. private student loans and what you should consider before signing on the dotted line.
Federal Student Loans
Federal student loans are offered by the federal government and are managed by several different service providers through the Department of Education. Federal loans are usually the first option students choose to finance their education. That’s because government-backed loans come with several benefits, making them an appealing option.
There are two types of federal loans students are eligible for: subsidized and unsubsidized. Subsidized student loans are offered to students with financial need. The government covers the interest that accrues on these loans while a student is in school. Unsubsidized loans, on the other hand, are offered to all students regardless of need. Interest on these loans accrues while a student is still in school.
There are strict Federal student loan borrowing limits. There are annual limits and aggregate limits. Undergraduate students are eligible for up to $31,000 in federal student loans of which $23,000 can be subsidized. That basically means the government is willing to fund up to $31,000, after that you’re on your own. Graduate students are eligible for up to $138,500 in federal student loans.
If you’re facing a funding shortfall, there is a third type of federal loan called the Direct PLUS loan. Students can’t take out this loan directly but if their parent claims them as a dependent, then their parents can take one out on their behalf - called a Parent PLUS Loan. Grad students can take out a Grad PLUS Loan.
The limit on PLUS Loans depends on where you attend school and how much other aid you receive. If your cost of attendance is $50,000 and you receive $30,000 in other aid, parents are eligible to take out the difference – or $20,000. Basically, you can borrow PLUS loans up to the total cost of attendance.
Federal Student Loan Forgiveness
One of the primary benefits of federal student loans is the potential for forgiveness in the future. This includes programs like Public Student Loan Forgiveness, which forgives student loan balances of individuals working for government organizations or in nonprofits. This is important to consider if your career path might make it difficult for you to repay your student loans in the future.
Repayment Options
Federal student loans also come with a variety of repayment options. You can access income-based repayment options that can make student loan repayment more manageable, especially when you might not have a large income at the start of your career.
Loans backed by the government typically come with lower interest rates and for undergraduates, have no underwriting requirements. That makes them more accessible than private student loans which students without a credit history might not be eligible for.
The biggest downside of federal student loans are the borrowing limits. If you don’t have a parent that is able or willing to take out PLUS Loans on your behalf, you might find yourself in a shortfall, requiring you to add private loans to the mix.
FAFSA
To access federal student loans, you first have to qualify for them. You can determine your eligibility by completing the Free Application for Federal Student Aid (FAFSA).
This application determines your family’s Student Aid Index (SAI) and will let you know whether you’re eligible for federal student loans and how much you can take out. It will also help you qualify for other financial aid options like grants and like work study.
Private Student Loans
When federal student loans aren’t enough – or if you don’t qualify – private student loans are another option. These loans are offered by lenders that specialize in student loans as well as banks and credit unions. They are offered with variable and fixed rates that vary across lenders.
Key Features
Unlike federal student loans, private loans don't have a limit - except the cost of attendance of the school you're attending. Loan terms tend to be longer, with many lenders offering repayment up to 20 years. If you have good credit and find yourself attending an expensive school, private loans may be preferable for covering the costs.
However, the best rates will always be offerer to short-term (5 year) variable rate loans.
Private loans may also be the preferred option for graduate students. While federal loans exist for individuals pursuing advanced degrees, there are limits to how much a student can borrow. In some cases, a private loan may offer better terms than a federal loan, especially if a graduate student has established credit and can get better terms.
Private loans may also be the only option for some schools - specifically vocational schools or coding camps.
Downsides to Private Student Loans
Private loans can be more expensive and harder to access than federal loans. They typically come with higher interest rates that are based on a borrower’s creditworthiness rather than their financial need. To determine rates and eligibility, lenders will do a credit check. This can be problematic for students who don’t yet have a credit history or meet other eligibility terms, like having an income.
Another downside of private loans is that they lack the flexible repayment options and forgiveness eligibility offered by federal student loans. If you had private loans during Covid-19, for example, you weren’t eligible for payment pauses.
Private lenders are known to be aggressive if you do fall into collections, and it's not uncommon to be sued by a lender if you fail to repay the loan.
Federal vs. Private Student Loans Compared
Federal Student Loans | Private Student Loans | |
|---|---|---|
Issuer(s) | Federal Government | Private lenders, banks and credit unions |
Approval | Easy | Credit-Based |
Repayment Options | Very Flexible | Less Flexible |
Borrowing Limits | Fixed Limits | Cost Of Attendance |
Graduate Student Eligibility | Yes; higher limits apply | Yes |
Is It Better To Have Federal Or Private Student Loans?
So, which are better: federal student loans or private student loans? Students may default to choosing federal loans because they’re the easiest and can be accessed as part of their financial aid package. That being said, you can choose whether or not to use federal loans or private loans. That choice will come down to your personal financial situation.
If you decide to enroll at an expensive school, you might hit the limit of federal loans you’re able to take out. Private loans may be necessary to cover any gaps.
You also want to shop around to find the best rate. While federal loans come with some benefits and rates are typically lower, you might find a private lender offering a better deal. They typically don’t come with origination fees that you’ll be expected to pay if you opt for federal student loans.
You’ll also want to look at your career goals before choosing which student loans to take out. If you plan to take a job with a non-profit, you may be eligible for certain repayment programs offered by the federal government. Private loans don’t come with the same opportunities for forgiveness. This is something you’ll want to think about before committing to one type of loan over another.
Related: Best Student Loan Rates
How To Apply For Student Loans
To apply for student loans, start by completing your FAFSA. You can submit your FAFSA anytime between October and June. This will determine your eligibility for a variety of government programs, like grants, in addition to student loans.
Once you’ve completed your FAFSA and received your student aid package from your university, crunch the numbers. If you have a shortfall, you can apply for private loans. Complete your application with the lender you’d like to borrow from and work with them to get your loan disbursed to your university to cover your costs.
Private loans have different terms, interest rates, and repayment requirements than federal loans. Whether you choose private or federal, you’ll want to evaluate all of the requirements so you know what’s expected of you when you finish your degree and when you’re responsible to begin making payments.
How Do I Know If My Student Loans Are Federal Or Private?
Students who pay for college with private student loans typically need to do so on their own terms. You’ll have a separate loan account from the financial aid you receive through the federal government or your university.
To see your federal student loan balance, you’ll want to check the Federal Student Aid website. You can do so by logging in with your ID. Your loans will typically be listed there. If you’re still in school or have recently graduated, the company servicing your student loans will likely reach out to you when it’s time for you to begin making payments.
You can also pull a copy of your credit report. Any loans you have will be listed there. This is generally a good practice to do at least once a year to monitor for identity theft.
Student Loan Alternatives
While student loans are an obvious way to finance a college education, they aren’t the only option. Here are some common student loan alternatives:
- Apply for scholarships. Millions of dollars are offered to students every year in the form of scholarships. This is free money that doesn’t require repayment. You can apply for scholarships before you start school and while you’re enrolled.
- Look for grants. Another form of free funding are grants. These are offered by federal government programs as well as privately by universities themselves. Grants aren’t always publicly advertised so you might have to do some searching to find them and determine if you’re eligible to apply for them.
- Work part-time. Some students may be offered a work study as part of their student aid package. This can grant you a job on campus but it isn’t the only way to earn money. Taking a job delivering pizzas or waiting tables can put you in good financial health when you graduate. You can use your earnings to cover small costs while you’re a student like textbooks or you can start paying your loans immediately to prevent interest from accruing.
There isn’t a right or wrong way to pay for college. Whether you opt for federal student loans or private, evaluate your situation and consider all options before taking on debt.
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Amanda Claypool is a writer, entrepreneur, and strategy consultant. She’s lived in the Middle East, Washington, DC, and a 2014 Subaru Outback but now calls Asheville home. Amanda writes about money, crypto, emerging tech, and the future of the economy on Medium.
Editor: Colin Graves Reviewed by: Robert Farrington