Updated: Oct 24, 2023
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Tuition, room and board, books, and other fees can add up to a lot of money. The truth is that most undergraduate students use a variety of sources to pay for their education, including family help, savings, scholarships, work-study jobs, grants, and student loans. Once you’ve exhausted sources of free money, you may need to borrow to cover remaining costs. When it comes to loans, you might decide to take out federal student loans, private student loans, or a combination of the two. Understanding federal vs. private student loans can help you make an informed decision.
Knowing a few basic terms used to describe student loans can help you move through the student loan process with confidence. Here are a few common terms associated with student loans:
Federal student loans | Private student loans | |
---|---|---|
Lender | Federal government | Private lenders, banks, and financial institutions |
Subsidized options | Yes, based on financial need | No, based on credit |
Interest rates | Fixed rates and everyone receives the same rate | Fixed or variable, with rates varying depending on the lender, as well as the borrower’s (and/or cosigner’s) credit |
Maximum amount loaned | Annual and aggregate loan limits based on year in school and dependency status | Varies by lender, but generally covers the cost of attendance minus other financial aid and aggregate loan limits may apply |
Origination fee | Yes, it’s a percentage of the loan amount that’s set every October 1 | Most private lenders do not charge one |
Repayment options | Multiple repayment plans ranging from 10 to 25 years, including options tied to your income | Plan options depend on the lender, but there are usually fewer repayment plans than federal loans |
Grace period | Six months, depending on the loan type | Typically six months |
Ability to temporarily pause or lower payments | Deferment and forbearance options may be available | Deferment and forbearance options may be available and vary by lender |
Loan forgiveness programs | May be available for eligible borrowers | Not usually, but varies by lender |
FAFSA® required? | Yes | No |
Federal student loans are made by the federal government. If you’re an undergraduate student, you have two options: subsidized loans, which are based on financial need, and unsubsidized loans, which are not. With a subsidized loan, the government pays the interest that accrues during school, deferment, and grace periods. With unsubsidized loans, you’re responsible for paying the interest that accrues during the life of the loan. If you don’t pay any accrued interest before the grace period ends, it will capitalize. That means the interest is added to the principal loan amount, which increases your total loan costs.
Interest rates on undergraduate federal loans are fixed and there’s a cap on how much you can borrow each year. After graduation, you can choose from different repayment plans, including ones based on income. And if you work in certain public service jobs or fields, there is the possibility of having your loans forgiven if you meet certain eligibility criteria.
Private student loans are made by financial institutions like banks and credit unions. And while federal loan terms are standardized, the terms of a private student loan will vary from lender to lender.
Interest rates on a private student loan can be higher or lower than rates on federal loans based on your creditworthiness and the creditworthiness of your cosigner, if you have one. Those rates can be fixed or variable. Repayment plans also vary by lender and are more limited than federal loans. Private student loans generally don’t offer loan forgiveness based on public service but may offer in the event of the borrower’s death or permanent disability.
After accounting for scholarships, grants, and work-study, you might need more money to pay for college. Consider federal loans first. Federal loan eligibility should be included in any financial aid award letters you receive. Compare your federal options to private student loans and choose the loans that best fit your needs.
Yes. In addition to Direct Subsidized and Unsubsidized Loans, the government offers these other types of federal loans: Direct PLUS Loans and Federal Consolidation Loans.
Direct Plus Loans help graduate or professional students, and parents of dependent undergraduate students pay for college. This loan type requires a credit check, the FAFSA, and a separate application.
The government also offers Federal Consolidation Loans when you are in the grace period or in repayment for your federal student loans. This type of loan allows borrowers to combine one or more federal student loans into a single loan.
FAFSA® is a registered trademark of the US Department of Education and is not affiliated with Discover® Student Loans.