Federal vs. private student loans: Which should you choose?

When financing your education, there are two main types of student loans you can choose: federal and private.

The Department of Education offers unique benefits, but you should expect lower borrowing limits with most federal loans. Private loans come from private lenders, and while they have more variation in terms, private lenders generally offer fewer benefits.

Here’s what you need to know about both types of student loans.

Federal vs. private student loans

Here are a few key differences between federal and private loans:

• Eligibility: Most federal student loans are available regardless of income or credit, while private student loans generally require good credit and income to qualify.
• Repayment: You’re typically locked into one payment plan after you borrow private loans. Federal loans offer flexible options, including income-driven repayment, and allow you to switch plans at any time.
• Interest rates: Federal loans have fixed rates, which never change over the life of your loan. Many private lenders offer the choice between fixed or variable rates — which can fluctuate over your repayment period.
• Forgiveness: Federal student loans offer forgiveness options for some borrowers who meet certain conditions. Private loans don't.

The table below shows what to expect in terms of interest rates, fees, and repayment terms for both federal and private loans. Remember, rates and terms vary among different kinds of federal student loans and between different private lenders.

Should I take out federal or private loans?

Deciding between federal and private loans is a personal choice to make based on your individual circumstances. Federal loans are the more popular option: They make up over 92% of all outstanding student debt, according to data from a June 2023 report by Enterval Analytics.

However, private student loans can still have a place in your college funding strategy, and many people take out a mix of both as each serves its own purpose.

Federal student loans generally have lower borrowing limits, especially for undergraduates. If you max out your federal funds, private loans can be a useful way to bridge the gap.

Well-qualified borrowers may also find lower rates with private student loans in some cases. While federal interest rates aren’t based on your credit, rates on private student loans typically are. Those with a strong credit history may be rewarded with better rates on the private market. And if you don’t have a particularly strong credit background, you can often apply with a cosigner who does.

Consider federal student loans first

For most borrowers, it makes sense to exhaust eligibility for federal student loans first. That's because federal loans offer many important benefits you can't get with private loans. There are a few types of federal loans to consider:

• Direct Subsidized Loans: Available for eligible undergraduate students in financial need, the Department of Education pays any interest that accrues while you’re in school, during periods of deferment, and during the grace period after you graduate.
• Direct Unsubsidized Loans: Undergrads can qualify for a Direct Unsubsidized Loan without proving financial need. However, you’re responsible for paying any interest that accrues for this loan. Graduate students can also take out Direct Unsubsidized Loans.
• Direct PLUS Loans: There are two types of these loans: PLUS loans for graduate and professional students and PLUS loans for parents. Unlike other federal options, Direct PLUS Loans require a credit check. However, those who have bad credit may still qualify for a loan.

Pros

• The government may pay some of your interest: You don’t have to pay for accrued interest on subsidized loans while in school or during deferment. With private loans, you’re typically responsible for interest costs at all times.
• Federal loans may offer forgiveness: You may be able to get loans forgiven if you work in public service or choose an income-driven repayment plan and make payments for a certain number of years.
• Federal loans are easier to qualify for: Your income and credit history don't matter when determining eligibility for most federal loans.
• You'll have a competitive, fixed interest rate: Your interest rate is determined based on the type of loan you borrow, not your credit or income. And your rate won't change over the life of the loan, since all federal loans have fixed interest rates.
• You have more repayment protections: You can change your repayment plan as needed, including switching to income-based plans, and you have many deferment and forbearance options.

Cons

• Some federal loans are need-based: You have to show limited family income to be eligible for subsidized loans.
• There are borrowing limits for federal loans: Both lifetime and annual limits mean you may not be able to borrow enough to fully fund your education.
• Your educational status determines eligibility: Only undergrads are eligible for subsidized loans, and students in their freshman year typically have the lowest borrowing limits.
• Your interest rate may be higher than on some private loans: Depending on the loan, your interest rate could be higher than some private loans — especially if you have excellent credit.
• You have to pay an upfront fee: There's an origination fee for all federal student loans, but not for most private student loans.

How to take out federal student loans

You will need to take the following steps to apply for student loans from the Department of Education:

• Complete your Free Application for Federal Student Aid (FAFSA): This will require providing details about your income and financial resources, as well as your family's information if you are a dependent student.
• Receive your financial aid package from your school: Your school will send you a packet detailing the types of financial aid available.
• Determine what kinds of loans to take out: See which federal loans best fit your needs, and how much you’ll need to borrow.
• Complete entrance counseling: If it’s your first time borrowing federal loans, entrance counseling is required. This explains your obligations and options for repayment.
• Sign a Master Promissory Note: This is a legal document in which you agree to repay what you borrowed, according to the included terms.

Private student loans can cover gaps in funding

If you’ve exhausted your options for grants, scholarships, and federal loans, private student loans can help you access additional money to pay for school. Make sure to understand the pros and cons of private loans before moving forward.

Pros

• You may be able to get a lower interest rate: Some private loans have lower starting rates than you would pay with federal loans, especially if you have great credit. A lower rate means smaller monthly payments and lower total interest costs over time.
• There are no upfront fees from most lenders: You typically don’t have to pay an origination fee with private loans, but this can vary by lender.
• You can borrow up to the cost of attendance: Many lenders allow you to borrow up to the school-certified cost of attendance. However, some lenders may set annual or lifetime borrowing limits.
• You have a choice of many lenders: You can shop around and compare rates and terms to find a private loan that's right for you.

Cons

• You need good credit and proof of income (or a cosigner): Many borrowers — particularly younger students — may not have the income or credit to qualify for a private loan on their own. In that case, you may need to ask a loved one who has good credit and a higher income to cosign for the loan.
• There are limited borrower protections: Generally, you can’t change your private loan repayment plan after you borrow (unless you refinance your private student loans). Income-based payment plans are very rare in the private marketplace, and depending on the lender, you may have few options for deferment or forbearance.
• You won’t have your loans forgiven: While federal student loans offer several paths to forgiveness, that’s not offered by private lenders.
• Your payment can change over time: If you choose a variable-rate loan, your rate will move according to financial benchmarks. Depending on larger economic trends, you risk your rate and payment rising unexpectedly.

How to take out private student loans

To take out private student loans, you’ll need to do the following:

• Decide how much you need: You can often borrow up to the school-certified cost of attendance, but the more you borrow, the higher your future payments will be.
• Shop around and compare rates: Online comparison shopping is simple and easy to do as many lenders allow you to check rates with only a soft credit check that won't damage your credit. This is an important step, as rates and terms can vary substantially between lenders. Keep in mind that when you actually apply for a loan, the lender will perform a hard credit check, which can temporarily lower your credit score by a few points.
• Choose between fixed- or variable-rate loan options: Variable-rate loans might have lower starting rates, but they change according to financial trends and can become more expensive over time. Fixed-rate loans are less risky, although you may pay a higher rate upfront.
• Find a qualified cosigner, if needed: You can ask a family member or loved one who has good credit and a stable income if they are willing to cosign for you. Your cosigner shares legal responsibility for your loan, and must repay your debt if you can’t afford to.
• Submit an application: Provide the requested information, including proof of income and authorization for a credit check.
• Select a repayment term: You may have a choice of repayment terms lasting anywhere from 5 to 25 years, depending on the lender. A longer repayment term generally comes with lower monthly payments, but higher total interest costs, over the life of the loan.

Be sure you don’t borrow more than you can comfortably afford to pay back, and think carefully as you decide what mix of federal vs. private student loans is right for you.