The vast majority of student loan debt in America is federal debt, meaning government loans that are issued directly by the U.S. Department of Education. In fact, more than 93% of all student loans fall into the federal category, leaving just a small portion of private educational debt.
There are a few reasons for this trend, including accessibility, costs and benefits. For many borrowers, federal student loans are easier to obtain, come with better protections and forgiveness options, and even have lower interest rates than private student loans. That’s why, in most cases, student borrowers should opt for federal loans before turning to private loans.
Here’s a look at some of the biggest benefits (and drawbacks) of federal student loans and how they compare to private student loans.
Table of contents:
- Federal student loan benefits
- Private student loan benefits
- Differences between federal and private student loans
- Federal loans vs. private loans: Which is best for me?
- Federal loans vs. private loans FAQs
Federal student loans
Federal student loans are those that are issued by the federal government to student borrowers and, in some cases, their parents. These loans offer various funding and repayment options, and borrowers are responsible for repaying the debt back with interest.
There are a few different kinds of federal loans available to undergraduate students, graduate students and professional students, including:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans (including Parent PLUS Loans)
Eligibility for some federal student loans is based on financial need and in some cases, a credit check may be required to qualify. But in general, federal student loans are widely accessible — one reason they’re the predominant way families borrow for college. Some federal loans are capped at a maximum dollar amount each year, while others allow you to borrow up to your total cost of attendance (minus any financial aid you’ve been offered).
Benefits of federal student loans
There are many benefits of federal student loans, especially when compared against private loans from banks, credit unions and other private lenders.
Fixed interest rates
Federal student loans have fixed interest rates that are set based on the results of a Treasury-note auction each year. This means that all federal borrowers will pay the same locked interest rate when borrowing money that school year, rather than rates being determined by factors such as credit history or repayment terms.
Financial hardship options
When repaying federal student loans, you can easily put your loans into forbearance, and there are also multiple deferment options. These mean that if you find yourself experiencing financial hardship, you may be able to temporarily pause or reduce your payments without penalty, aside from interest accrual. And in some cases (depending on the type of loan), interest will not continue to accrue on your loan(s) during this time.
Federal student loans also offer income-driven repayment plans, or IDRs. These plans allow you to adjust your monthly payment according to your household size and family income. This can make managing your student loan repayment easier, especially if a typical loan payment would account for a notable percentage of your take home pay. After you’ve made qualifying payments for a certain number of years on these plans, any remaining loan balance can be forgiven
Additionally, certain federal student loan borrowers may qualify for student loan forgiveness programs. The most well-known of these programs is Public Service Loan Forgiveness (PSLF), which grants loan forgiveness to graduates who work for certain nonprofit organizations or in public service jobs. As long as you work in an eligible field or position, any remaining federal student loan balance can be forgiven after making 120 qualifying loan payments.
Some loans are subsidized
If you have financial need (according to the Free Application for Federal Student Aid, or FAFSA) you can qualify for a subsidized federal student loan, meaning you can defer your loan repayment until after graduation without paying interest during that time. That’s because the federal government will subsidize, or take on the financial obligation of, any interest charges your loan may accrue while you’re attending school, during a six month grace period after graduation or during any deferment period you may require.
You’ll be responsible for any interest that accrues after you graduate or otherwise drop to less-than-half-time enrollment, but this subsidization can save you hundreds (or even thousands) of dollars in initial interest charges.
Drawbacks of federal student loans
Of course, there are also some downsides to federal student loans.
With all undergraduate loans and Direct unsubsidized loans for graduate school, you’re only able to borrow a certain amount of money per year toward your educational expenses. In some cases, this may not be enough to cover your full tuition, fees and other costs, so you could find yourself still looking for other ways to cover the difference.
No federal refinancing to reduce interest
After you leave school, you can combine your federal student loans into one loan with a single interest rate, called a Direct Consolidation loan. While this is similar to private refinancing, the interest rate on a Direct Consolidation loan is simply an average of the rates on the loans you’re consolidating. There is no option to refinance federal student loans without converting your federal loan into a private student loan. Refinancing may help you lock in a lower interest rate, and therefore save money. But if you refinance federal student loans, you’ll give up access to all of the benefits listed above.
Loan fees apply
Federal student loans have origination fees that are applied when the loan is first disbursed. These fees add to the overall cost of the loan and can increase your total educational debt. Private student loans, by contrast, typically don’t have origination or application fees.
Private student loans
Private student loans are those that are issued by private lenders, banks and other financial institutions. These loans are not backed by the federal government, so they have many different features than federal student loans.
For example, each lender is able to set its own fixed or variable interest rates. And while certain federal loans may have annual borrowing limits, private student loans are only limited by the borrower’s qualifications and the student’s actual cost of attendance.
Depending on the specific situation, some college students may choose to take out private student loans in addition to, or even in lieu of, federal loans.
Benefits of private student loans
Experts stress that private student loan debt is a riskier form of debt than federal debt. But there are still many benefits to taking out a private student loan for your educational expenses.
Higher borrowing limits
Many federal student loans have an annual borrowing cap, which varies based on the student’s year of study and whether the borrower is considered a dependent or independent student on the FAFSA. Private student loans, by contrast, don’t have a set cap aside from the lender’s own maximum limits and what you qualify to borrow.
Subsidized federal student loans are limited to borrowers who are able to demonstrate financial need. If you don’t meet these criteria, you have to take out unsubsidized loans.
Private student loans, on the other hand, are not needs-based. You won’t be asked to demonstrate any financial need before borrowing, as long as you and/or your cosigner qualifies.
Interest rates are personalized
The interest rates charged on private student loans are based on the lender’s published annual percentage rate (APR) range at the time of issue and the borrower’s own qualifications. This means that some private student loan borrowers will be offered lower interest rates on their loan(s) than other borrowers. In some cases, it may be possible to qualify for a lower interest rate with a private loan, particularly if you (or your cosigner) have excellent credit and you’re looking at federal PLUS loans for parents or graduate students, which carry higher rates than federal loans for undergraduate students.
Drawback of private student loans
Even though private student loans may be necessary for some borrowers, they come with their own downsides. When borrowing for college, it’s important to keep these in mind.
Cosigners are often required
Since private student loans aren’t backed by the federal government, borrowers may need to meet more stringent requirements to qualify. Especially for undergraduates — who have a limited or nonexistent credit history — this almost always means applying with a cosigner, such as a parent or guardian.
Loans are not subsidized
Some federal student loans are subsidized, meaning the government covers the interest charges that accrue while you’re in school at least half-time. With private student loans, however, this interest will simply build.
Loan protections are not automatic
Federal student loans automatically include forbearance and deferment options for borrowers who later find themselves experiencing financial hardship. While many private lenders will offer the same protections (either as a general rule or on a case-by-case basis), it’s not guaranteed and it’s usually for a much shorter period than the federal system.
Limited loan forgiveness opportunities
You will not get your private student loan balances forgiven, even if you work in public service or with certain nonprofit organizations after graduation. Some borrowers can qualify for loan forgiveness on their federal loans, though, potentially saving thousands in loan payments.
While there are not broad forgiveness programs for private student loans, you may be able to get some repayment assistance with your private loans through select state programs or even your employer.
No income-based repayment
Your private student loan payments will be calculated according to the amount you borrowed, your interest rate and the repayment term offered. This could mean making hefty loan payments right out of college, even if those payments account for a significant portion of your income. Most private lenders do not offer any sort of payment plan that offers smaller payments when you first graduate.
Federal student loans, on the other hand, offer income-based repayment plans that adjust your monthly loan payment to your family size and discretionary income. This ensures that your student loan payments account for a reasonable portion of your income.
What are the differences between private student loans and federal student loans?
5.50% - 8.05% for the 2023-2024 school year
Fixed and variable rates
Varies by lender, currently about 4% to 16%
Up to 30 years
Up to 30 years, though many lenders only offer terms up to 15 years.
Up to $31,000 aggregate for dependent undergraduates, up to $57,500 aggregate for independent undergraduates
Up to $138,500 aggregate for graduate or professional students, in subsidized and unsubsidized loans
Direct PLUS loans are only limited by the actual cost of attendance minus any financial aid
Up to the cost of attendance
1.057% loan fee for subsidized and ubsubsidized Direct loans
4.228% loan fee for PLUS loans
Eligible for four income-driven repayment plans
Federal vs. private student loans: Which is right for me?
When it comes to funding an education, federal student loans should almost always be taken first, before opting for private student loans. These loans offer greater protections for borrowers, additional repayment options, the opportunity for loan forgiveness and fixed interest rates. For most borrowers, they’re easier to obtain, too.
Depending on how much you need to borrow, you may find a mix of federal and private student loans is necessary to cover your expenses.