Federal vs. Private Student Loans

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federal vs private student loansStudent loans are confusing. There are so many different loan options, each with different interest rates, eligibility requirements and repayment options.

To make matters even more complicated, there are two different places you can get student loans: private lenders and the federal government, specifically the Department of Education (ED).

Federal and private student loans differ in eligibility requirements, repayment terms, and rates.

Before you take out student loans, it’s vitally important to understand all of your options.

Federal Student Loans

Currently, there are 3 different types of student loans you can potentially take out from the federal government, these are:

  1. Direct Subsidized Loans
  2. Direct Unsubsidized Loans
  3. PLUS Loans for parents or graduate students

Each type of loan comes with its own eligibility requirements, interest rate, and repayment options.


To qualify for any federal student loan you will first need to fill out the Free Application for Federal Student Aid (FAFSA). You can do this online, and if you filed your taxes electronically it should be a pain-free process unlike in the days of analog.

Some loans are issued based on need, like Direct Subsidized Loans. Direct Unsubsidized Loans are pseudo-needs based, meaning that you’ll only qualify for an amount that covers your gap in funding between other aid and your full bill from your school.

Direct PLUS loans are issued to parents or graduate students. You or your student do have to fill out the FAFSA before officially applying, just like with the other two loans. But for a PLUS Loan, your credit will also be checked. If you don’t have a good credit history,  you will have to get a cosigner or submit an acceptable extenuating circumstance that caused your bumpy history with credit.


Rates for loans disbursed before July 1, 2021 are:

Type of Federal Loan Borrower Type Fixed Interest Rate
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Not all federal loans come with the same interest rate. The desirability of the interest rates go down as other terms of the federal loan present unfavorably.

For example, Direct Subsidized Loans offer the best repayment terms while simultaneously offering the best interest rate.

PLUS loans offer the highest interest rate, qualify for the least federal repayment plans and require a credit check.

Repayment Options

Federal student loans have several repayment options. These repayment options are one of the biggest reasons to choose federal over private student loans.

First of all, when you have a federal loan, you will not have to start repayment until six months after graduation. During that time, interest does accrue. You can prevent this interest from making your principal balance grow by making interest-only payments while you’re in school.

You can also prevent this by choosing to take out a Direct Subsidized Loan if you’re eligible. These loans are subsidized by the federal government, meaning that the government will make your interest payments for you while you’re in school and deferment following graduation.

Once you do start repayment, you’ll have lots of different options as far as how you structure that payment.

  • The Standard Repayment Plan: The Standard Plan provides you with fixed monthly payments which will pay off your debt in full by the end of a ten-year period.
  • The Graduated Payment Plan: The Graduated Payment Plan works in a similar manner except your payments will be smaller at the beginning of the repayment process and larger at the end of your ten-year term. They will gradually grow every two years.
  • Extended Repayment Plan: Extended Repayment Plans can be fixed or graduated, but they extend repayment over the course of 25 years instead of ten.

PLUS loans made to parents only qualify for these three repayment plans, while Direct Subsidized, Direct Unsubsidized and PLUS loans made to students can enter the following repayment plans as well.

This class of repayment plans is known as income-driven repayment plans. The idea is that you’ll only pay a certain percentage of your disposable income every month. This amount cannot exceed the amount you’d pay on a monthly basis if you were on a Standard Repayment Plan.

  • Income-Based Repayment Plan: The Income-Based Repayment Plan (IBR) limits your payments to ten percent of your disposable income. You will pay for 20 years — or 25 if your loans were for grad school — and then the remainder of your balance will be forgiven.
  • Repay as You Earn (REPAYE): Repay as You Earn (REPAYE) works in the same way except it takes your spouse’s income and student debt under consideration whether or not you file a joint tax return. IBR only counts their income if you filed taxes jointly.
  • Income-Contingent Repayment (ICR): The final repayment program for which Direct Loans are eligible is Income-Contingent Repayment (ICR). On this repayment program, you will pay 20% of your discretionary income, your spouse’s income and debt will only be counted if you file a joint tax return, and any amount left after 25 years will be forgiven.

Private Student Loans

Private student loans are issued by banks, credit unions and online marketplace lenders. Banks and credit unions are likely familiar, but online marketplace lenders have only started sprouting up in this space in the past decade in full force.

Some lend generously, while others are only trying to attract clientele with a high education level working in high-paying fields.


To qualify for a student loan from a traditional private lender, you’re going to need credit history and good credit history at that. This is a problem for traditional college students who often haven’t yet had an opportunity to build their credit.

It can be resolved, though, by getting a cosigner with good credit. Some lenders will even release the cosigner from their responsibilities after a set amount of time if you have built sufficient credit history in the interim.

Some marketplace lenders don’t run your credit score, but are more interested in your career potential. This is especially useful when you’re looking at refinancing your student loan and have already established your career, as income is typically a factor, too.

Best Rates for Private Student Loans

To give you an idea of what’s out there, here are the current top rates for private student loans.

Lender Fixed Interest Rate Variable Interest Rate
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Bear in mind that the best rates are going to be reserved for those with a great credit history, or in the case of marketplace lenders, those with a high likelihood of bringing in a high income with which to repay the loans.

Remember to check and see if the rate you are being offered is variable or fixed.

Fixed rates are more predictable as they’ll stay steady throughout the course of your loan.

Variable rates will change with the market. They’ll often start lower than the fixed loans, and while they do have the potential to go even further down, they could also rise.

You don’t want to be caught off guard.

Repayment Options

While there may be exceptions, in general, you should expect to start repaying your private student loans immediately, while you’re in school.

These won’t just be interest-only payments; you’ll need to make full payments that include interest and principal.

You will also not have access to repayment programs like the ones the ED offers. That means it doesn’t matter if your income isn’t what you expected after graduation; you have to make the full payments anyways or your credit history will pay the consequences.

There are no income-driven repayment programs, though some private lenders will allow for periods of deferment in times of hardship.

If you go through a marketplace lender, you’re more likely to find perks along your repayment journey. For example, some lenders will offer career coaching, mentors or access to networking groups.

They want to see you employed so you can start paying them again.

Federal vs Private Student Loans: Which wins?

Federal loans are more often than not a better option for student borrowers. Private student loans generally only have lower interest rates if the borrower is well-off; for everyone else, the rates are likely to be higher and the repayment options are far more strict.

If you must take out student loans, look at federal student loans first. Besides, by filling out the FAFSA to apply for your loans, you may just surprise yourself and end up with some grant offers  — which is money you’ll never have to pay back.

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