Federal vs. private student loans

In a nutshell

Federal student loans make up the vast majority of financial aid received by college students, but private student loans can fill financial gaps after you've exhausted other options.

• Federal student loans come with benefits like student loan forgiveness programs, affordable repayment plans and loan deferment and forbearance options.
• When you refinance federal student loans, they become private loans and you lose access to the above benefits.
• Qualifying for private student loans may require a cosigner if you don't meet a lender’s borrowing requirements.

Federal student loans

A federal student loan is provided by the U.S. government through the Department of Education to help college students pay for their education. They make up the majority of annual student loan aid. To qualify for federal student loans, you must fill out the Free Application for Federal Student Aid (FAFSA) form.

Types of federal student loans

Federal student loans generally fall into three categories:

Direct Subsidized Loans

Designed for undergraduate students with financial need, no interest is charged on Direct Subsidized Loans while you're in school at least half-time. You also won’t pay interest during periods of deferment or a six-month grace period after you graduate or leave school.

Direct Unsubsidized Loans

These loans aren't granted based on financial need. The school determines the amount you will receive based on the cost of attendance and any other aid you receive. The government charges interest during all periods. Unpaid interest can eventually capitalize, meaning it gets added to the principal loan balance. You’re responsible for paying all accrued interest regardless of whether or not it capitalizes.

Direct PLUS Loans

Available for parents and graduate students, Direct PLUS Loans are a type of unsubsidized loan that can cover up to the cost of attendance. These are the only federal student loans that require a credit check. Borrowers with adverse credit must meet other criteria to qualify for a PLUS loan.

What are the benefits of federal student loans?

Federal student loans have several advantages, making them an attractive option for students.

• Flexibility: Federal student loans offer several repayment options besides the standard 10-year plan, including Income-Driven Repayment (IDR) plans, which can dramatically reduce your monthly payment amount based on your income.
• Protections: Federal loans come with notable protections, including forbearance and deferment options.
• No cosigners: Outside of PLUS loans, there are no credit checks or cosigner requirements attached to federal student loans.
• Loan forgiveness: You may qualify for federal student loan forgiveness programs, including Public Service Loan Forgiveness, IDR loan forgiveness and Teacher Loan Forgiveness. These programs wipe out or reduce your student loan balance — sometimes without tax implications.

What are the drawbacks of federal student loans?

• Loan limits: Some federal student loans are subject to annual and aggregate limits, so they may not cover all of your educational costs.
• Taxes: Borrowers on IDR plans with a balance after the end of a 20- or 25-year repayment period automatically receive forgiveness on their remaining balance but must pay income tax on the amount forgiven.

Related: Guide to student loans

Private student loans

Private student loans are available through select banks, credit unions and other private lenders. They are not associated with the federal government. Lenders set the terms, conditions and requirements for private student loans, and they can have fixed and variable interest rates. Lenders may offer several payment options, including deferred or interest-only payments while in school.

You must meet the lender's underwriting requirements to qualify for a private loan, which may include specific credit score, income and employment criteria. If you have excellent credit, you might qualify for lower interest rates than those on federal student loans.

Often, lenders let you check rates before officially applying for a loan. This process involves providing some personal information and a soft credit check, which doesn't negatively impact your credit score.

Students without enough income or credit history to qualify for a private student loan on their own can apply with a cosigner. This opens the door to qualifying for a larger loan and better interest rates.

Cosigners are typically someone you trust, such as a parent, extended family member or mentor. When someone cosigns for you on a loan, they are financially responsible for paying back the balance if you’re unable to make payments. Some lenders allow you to apply for a cosigner release after you meet specific criteria, such as a set number of on-time monthly payments or a certain credit score.

Private student loans are often available for higher amounts than federal loans. In many cases, borrowers can receive up to the cost of attendance minus other financial aid received.

What are the benefits of private student loans?

• Lower interest rates: If you have a high credit score, you may qualify for a lower interest rate or better loan terms.
• Payment options: You may qualify for deferred or interest-only payments while you attend school.
• More financial aid: You may qualify for more funding through private loans, which may be available up to the cost of attendance minus any other aid received.

What are the drawbacks of private student loans?

• No federal protections: Private lenders generally offer fewer protections than federal loans if you face hardship during loan repayment.
• May require a cosigner: Many students will need the help of a cosigner to qualify for private student loans, especially for undergraduate loans.
• No loan forgiveness: Private lenders do not offer loan forgiveness programs like the government does.
• Set payments: Generally, loan payments are set and will not change for the life of the loan. Refinancing is the only way to lower your monthly payments.
• Not always discharged: Federal loans are discharged if a borrower passes away, meaning the outstanding debt doesn't count against their estate, but that may not be the case with private lenders.

The AP Buyline roundup

Federal student loans are generally considered the best option to start with if you plan to borrow money for college. Fill out the FAFSA form each year of enrollment to determine how much you're eligible to receive from the government. Max out federal student loans first to take advantage of benefits like generous repayment plans, loan consolidation and borrower protections. Determine if you qualify for federal student loan forgiveness programs.

If you still need money for school, private student loans can fill in the gaps. Shop around to compare rates from multiple lenders before applying. Consider other factors when choosing a private student loan, including borrower and cosigner requirements, repayment terms and conditions, deferment options and maximum loan amounts.

Frequently asked questions (FAQs)

Is it hard to qualify for federal student loans?

Most U.S. citizens and eligible noncitizens enrolled in an eligible degree program at a recognized college or trade school qualify for federal student loans.

How do you borrow money for college through federal loan programs?

You must fill out the Free Application for Federal Student Aid (FAFSA) form to qualify for federal student loans. The Department of Education processes your application, and your school determines how much aid you're eligible to receive based on the information you submit. You must demonstrate financial need to qualify for some types of federal student loans.