Private vs. Federal Student Loans
There are two types of student loans: federal student loans and private student loans. If you’re trying to figure out how you are going to pay for college, you’ve likely encountered both. Federal and private student loans are not the same, and it’s important to know the difference.
Let’s start with federal student loans.
Federal Student Loans
Federal student loans are made and funded directly by the federal government. To apply, you need to complete the Free Application for Federal Student Aid (FAFSA). There are a few types of federal loan programs, and they are awarded based on set eligibility criteria, including financial need. The main federal student loans break down as follows:
Types of Federal Student Loans
- Direct Subsidized Loans (subsidized Stafford loans) are available to undergraduate students with financial need, and recipients are not responsible for paying the interest charges on the loan while in school.
- Direct Unsubsidized Loans (unsubsidized Stafford loans) are available to undergraduate and graduate students who meet the eligibility requirements, but there is no requirement to demonstrate financial need.
- Perkins Loans are available to undergraduate and graduate students with exceptional financial need.
- Direct PLUS Loans are available to eligible graduate students and parents.
Direct Subsidized and Direct Unsubsidized Loans (also known as Stafford Loans) are the most common type of federal student loans for undergrad and graduate students. They comprise over 70% of annual student loans issued. Direct PLUS Loans (also known as Grad PLUS and Parent PLUS) have higher interest rates and disbursement fees than Stafford Loans.
Direct Subsidized (Stafford) Loans
To qualify for a Direct Subsidized Loan (also known as a Subsidized Stafford Loan), you must be an undergraduate student and demonstrate financial need. No credit history is required to qualify for this type of federal student loan.
With a Direct Subsidized Loan, you do not have to pay interest while you are still in school. The government assumes responsibility for the interest accrued in that time period.
Direct Unsubsidized (Stafford) Loans
Direct Unsubsidized Loans (also known as Unsubsidized Stafford Loans) are federal loans issued to both undergraduate and graduate students. Students are not required to demonstrate financial need to qualify for these types of student loans, and no credit history is required to qualify.
Interest will begin accruing at the time of your loan disbursement.
Loans made through the Federal Perkins Loan Program are issued to both undergraduate and graduate students and are reserved for those with exceptional financial need. While Congress sets fixed interest rates for the life of federal student loan, Perkins Loans have a separate fixed rate, which is a bit lower.
As with Stafford Loans, no credit history is required to qualify for a Perkins Loan. However, not all colleges participate in this program, so be sure to check with your school’s financial aid office for more information.
Parent PLUS Loans
Parents of dependent undergraduate and graduate students can borrow money to pay for their child’s education. Fixed interest rates on Parent PLUS loans tend to be slightly higher than those for Stafford Loans, and the borrower must have good credit to qualify.
Grad PLUS Loans
The Grad PLUS Loan is a federal student loan available to graduate and professional students. Unlike Stafford and Perkins loans, which do not consider a graduate student’s credit history for qualification, Grad PLUS borrowers must have good credit.
Federal Student Loan Comparison Chart
Direct Subsidized / Stafford Loan
Direct Unsubsidized / Stafford Loan
Parent PLUS Loan
Grad PLUS Loan
Undergraduate and Graduate Students
Undergraduate and Graduate Students
Parents of Dependent Undergraduate and Graduate Students
Federal Student Loan Interest Rates
Federal student loan interest rates and fees are set at the start of each academic year and remain fixed for the life of the loan. Federal loans come with a standard repayment schedule and offer a wide range of repayment assistance options, including forgiveness for qualified borrowers, forbearance, deferments, and Income-Based Repayment (IBR) or Pay As You Earn (PAYE and REPAYE) plans that tailor the monthly payments to your income level.
For more details on eligibility criteria, repayment assistance, and current rates, visit https://studentaid.ed.gov.
To apply for federal student loans, you need to complete the Free Application for Federal Student Aid (FAFSA). You can use this step-by-step guide for help filling it out, and be sure to avoid these 10 common errors.
Variable vs. Fixed Loan Interest Rates
A variable interest rate can fluctuate over the life span of a loan. A fixed interest rate is just as it sounds – fixed and unchanging for the life of a loan.
At the time of your loan disbursement you might discover that variable interest rates are lower than the federal student loan fixed rate, but there are advantages to having a stabilized rate. For more information, see our Variable vs. Fixed Interest Rates resource page.
Federal Student Loan Repayment Plans
Every loan comes with terms for how and when you will be required to repay it. The repayment “term” usually refers to the amount of time you are given to repay your loan. Paying the loan back sooner will result in a lower overall cost but will result in larger monthly payments. Repayment “terms” can also refer to different options for repayment.
In the case of federal student loans, the Department of Education (DOE) sets out all terms for repayment. If circumstances make monthly payments difficult to meet, the DOE has programs that can lower or erase your monthly payments, and/or extend your repayment duration.
With an Income-Based Repayment (IBR) plan, monthly loan payments are capped based on a percentage of your discretionary income, with remaining debt forgiven after a specified number of years (usually 20 to 25 years, depending on the IBR). “Pay-As-You-Earn” (PAYE) and the “Revised-Pay-As-You-Earn” (REPAYE) fall into this category.
There are pros and cons to IBR. On the upside, reduced monthly payments can alleviate a financial burden. On the downside, accrued interest and a longer repayment term can cost you more over time.
Parent PLUS loans and private student loans are not eligible for Income-Based Repayment plans.
Forbearance and Deferment Options
Forbearance and deferment are terms that refer to a period during which your federal student loan monthly payments are postponed or reduced due to financial hardship or other circumstances.
The type of federal loan you’ve been issued determines whether or not interest will accrue during this time. Deferment often refers to postponements or reduction periods for federal loans issued to students who have demonstrated financial need (Direct Subsidized Stafford loans and Perkins loans), during which interest will not accrue.
Interest will accrue during postponement or reduction periods for all other types of federal student loans.
Student Loan Forgiveness is sometimes referred to as “cancellation” or “discharge.” These terms are essentially interchangeable, but they are used in different situations that qualify for complete loan forgiveness.
Discharge in the Event of Loss or Disability
Permanent disability can qualify you for student loan cancellation. Death also qualifies as a life event that cancels or discharges a loan. The death of a parent cancels a Parent PLUS loan, while the death of a student cancels out a federal loan issued in that student’s name.
You have the option to start paying off your student loan while you are still in school. This saves you money but is not required with federal student loans.
The government offers a grace period, during which you do not need to pay anything on your loans until at least six months after graduation.
Refinancing Federal Loans to Private
In some cases, borrowers might choose to refinance federal loans to private. This option is usually exercised to obtain a lower interest rate or to release a cosigner from their obligation to the loan. However, when you switch from a federal repayment program to a private one, your loan might be subject to the fluctuations of variable interest rates and you will no longer be eligible for the protections and benefits, like income-based-repayment and loan forgiveness.
Federal Student Loan Eligibility
To apply for a federal student loan through FAFSA, you must meet the Department of Education’s basic criteria. Depending on the type of federal loan you pursue, there could be additional requirements.
If you are interested in securing a Direct Subsidized Stafford Loan or a Perkins Loan, you will need to demonstrate financial need.
Financial need is based on your cost of attendance (tuition, fees, expenses, room and board) as submitted by your school. This amount is compared to your EFC (Expected Family Contribution) which takes into account factors such as:
- Your family’s income (taxed and untaxed)
- Your family’s current assets
- Any benefits (such as Social Security and unemployment) you or your family receive
- Size of your family
- How many siblings you have attending college during the school year
Your EFC is subtracted from your cost of attendance (COA) to assess your financial need.
Federal loans have borrowing limits built in. These can differ depending on the type of student and the type of loan. The government sets additional limits as follows:
- Annual Loan Limits – maximum amount you can borrow in a single academic year
- Aggregate Loan Limits – total amount you are allowed to borrow during your academic career (sometimes called a “cumulative limit”)
- Cost of Attendance Limits (COA) – stipulation that the loan must be less than the school’s official cost of attendance minus other financial aid received
If your student status changes from full- to part-time, or if you need to temporarily withdraw from your studies, your student loans could be affected. Terms vary for each loan, so be sure to consult with your school’s financial aid office to make sure you understand any related changes to your loan responsibilities.
Matriculation vs. Non-Matriculation
A matriculated student refers to most college students – one who has been accepted to a college or university and is enrolled in classes toward the pursuit of a degree.
A non-matriculated student might refer to someone who is attending classes at that same school toward future matriculation status, or within a non-degree certificate program. Federal student aid is not available to non-matriculated students, but there are some exceptions. For example, if you are completing courses toward a teaching certificate or attending classes that are required to enter a degree program, you might qualify for a federal student loan.
Private Student Loans
Private student loans, sometimes referred to as non-federal or alternative loans, are made and funded by private lenders, such as banks and financial companies. Private student loans usually require a credit and income review to determine an individual’s anticipated ability to repay the loan.
Types of Private Student Loans
What is considered a private student loan? The short answer is, any student loan not issued by the government. Student loans other than FAFSA loans can be helpful to those who do not qualify for a federal student loan, or whose federal student loan does not cover enough of their expenses.
Private Undergraduate Student Loans
Private student loans for undergraduate students function similarly to other types of private loans in that a credit and income review will be required to determine your ability to repay the loan. This review can also affect the interest rate on your loan. Since most undergraduate students have not yet established a credit history or have a steady income, it is often necessary to apply with a cosigner.
Learn more about undergraduate student loans at College Ave.
Private Parent Student Loans
Some private lenders offer parent loans, which are made to a parent or guardian who is helping a student pay for school; the student is not legally responsible to repay a parent loan.
Learn more about parent student loans at College Ave.
Private Graduate Loans
Private loans for graduate students work similarly to other types of private student loans; a graduate student might need a cosigner or have a parent or guardian take out the loan for them. However, if you’re a graduate student with a solid credit history, you could qualify individually for a lower interest rate.
Learn more about graduate student loans at College Ave.
Private Student Loan Interest Rates
Private loan terms, including interest rates and fees, vary by lender and usually are determined based on your credit history (and potentially other factors). Most lenders offer both variable and fixed interest rates.
A fixed rate remains unchanged for the life of the loan. This can be helpful when making financial plans, as your monthly payments will be known. Variable interest rates can fluctuate, which makes monthly payments harder to predict. However, depending upon your credit history, you might obtain a rate that stays relatively low, even with fluctuations.
Federal loans offer fixed interest rates, which is just one reason they are frequently considered beneficial over private student loans.
Private Student Loan Repayment Plans
When it comes to repayment after graduation, many private student loan lenders will offer payment assistance if it’s needed, but the available options are more limited than federal loans. For example, private lenders typically cannot offer income-contingent repayment plans or loan forgiveness. That said, the terms of a private loan can typically be altered after signing if assistance is needed.
The sooner you begin paying down the principal and interest on a private loan the better, but circumstances do not always allow for that. Repayment options vary by lender but common plans include:
- Interest Only – You make interest-only payments for the first two years of the repayment term of your loan.
- Interest Plus – You make interest payments, along with a monthly amount you determine for the first two years of the repayment term.
- Full Principal and Interest – You start repaying your principal plus interest right away.
Some lenders offer more repayment flexibility than others. At College Ave., in addition to offering a forgiveness policy, we work with you on repayment options, should you encounter financial hardships.
Learn more about student loan refinancing options at College Ave.
Private Student Loan Eligibility
Since many students have limited credit history and income, private student loans typically require a cosigner. A cosigner is often a parent or other family member who has established credit and income who agrees to take equal responsibility to repay the loan if the student borrower is unable.
Federal vs. Private Loan: Which Student Loan Is Better For Me?
A comparison of student loans doesn’t yield a one-size-fits-all answer, but because of the low fixed rates and repayment assistance programs that are available, it’s generally best for students to exhaust their federal Direct Unsubsidized and Subsidized Loans before considering private student loans. There are, however, limits to how much you can borrow under the Direct Loan program, which is where private student loans come into the mix if the federal funds are not enough to cover the cost of attendance.
Before making a decision about how you will finance your education, it is important to consider the differences between private student loans and federal loans as they apply to you and your overall financial picture.
Key variables to keep in mind include interest rates, repayment plans, and eligibility.
Benefits of Federal Student Loans
Benefits of federal student loans include:
- fixed interest rates for the life of the loan
- repayment assistance options (including income-based-repayment)
- subsidized loans for those who demonstrate need
Benefits of Private Student Loans
A private student loan might offer a lower interest rate, depending upon your credit rating and income (or that of your co-signer). Some also offer higher borrowing limits and fixed interest rates. Private student loans do not require any demonstration of financial need.
Federal Direct PLUS Loan vs. Private Loan
If you are a parent or graduate student considering a Direct PLUS loan, you may want to consider a private student loan. If you have a strong credit history, you may be able to save money with a private student loan. Just make sure you review the benefits – such as public service forgiveness – that are unique to the federal program before you make your final decision.
“What’s the difference between financial aid and student loans?”
Student loans – federal and private – are all part of your financial aid package, which can also include scholarships and endowments. When you work with your school’s financial aid office directly, you are sure to get a complete picture of your options. Your school determines your costs, so that is a solid place to start exploring all assistance options.