What’s the difference between private and federal student loans?

Student loan basics

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 Direct Subsidized vs. Unsubsidized loans: These are the two different types of federal student loans offered by the government for undergraduate students to borrow:

Direct Subsidized Loans are loans based on financial need. The government pays the interest on them while you’re in school at least half-time, during the grace period, and during a deferment.
Direct Unsubsidized Loans are not based on need, so you’re responsible for paying the interest that accumulates during the life of the loan.

Interest rates and fees: Interest is what you pay to borrow money. The i nterest rate tells you how much it costs to do so and is expressed as a percentage of the loan amount. Some student loans carry fees, including origination fees and late fees. These can add to the total cost of your loan.

Fixed vs. variable interest rates: There are two types of interest rates:

Fixed interest rates won’t change during the life of the loan. All federal loans have fixed interest rates.
Variable interest rates fluctuate based on market indexes. That means your minimum payments can go up and down during the life of the loan. Private student loans often let you choose between a fixed or variable rate.

Grace period: This is a period of time after you graduate or drop below half-time enrollment when you aren’t required to make loan payments. When the grace period ends, you are required to start making payments of principal and interest.

Cosigner: This is an adult (most often a parent) who accepts responsibility for the loan repayment with you. If you do not have an established credit history to qualify for a private student loan on your own, you may have the option to apply with a creditworthy cosigner. Adding a cosigner can help improve your likelihood of getting approved, and you may receive a lower rate. Direct Subsidized and Unsubsidized federal loans do not require a cosigner.

Undergraduate federal vs. private 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

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

How do federal student loans work?

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.

How do private student loans work?

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.

How to get federal vs. private student loans

Federal student loans: To apply for a federal loan, you must fill out the FAFSA every year you are in school. It is available on October 1 each year.

Private student loans: Submit an application directly to the specific lender. It may be necessary to apply with a cosigner if you don’t meet the credit requirements.

Is it better to have federal or private student loans?

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.

Are there other types of federal student loans?

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.