Article highlights

  • Federal student loans are offered by the government. Private student loans are provided by a financial institution.
  • Some federal student loans are based on financial need, and private student loans are based on creditworthiness.
  • Federal loan terms are standardized while the terms of a private student loan vary from lender to lender.

Understanding federal vs. private student loans can help you make the best choice for you.

So you got into college. Congrats! Now you need to figure out how you’ll pay for it. While yes, tuition, room and board, books, and other fees can add up to a lot, most students use a variety of sources to fund their education, including family help, savings, scholarships, work-study jobs, grants, and student loans. Once you’ve exhausted sources of free money like savings, scholarships, and grants, 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.

First, let’s cover some student loan basics. Knowing a few common terms used to describe student loans can help clarify things, and also make the whole subject seem a little less intimidating.

  • Federal Direct Subsidized vs. Unsubsidized loans: Direct Subsidized Loans are loans offered by the government 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. Unsubsidized loans are not based on need, so you’re responsible for paying the interest that accumulates during those times.
  • Interest, interest rates, and fees: Interest is what you pay to borrow money. Interest rates tell you how much it costs you to do so and are a percentage of the loan amount. Some student loans carry fees, including late fees and origination fees. These can add to the total cost of your loan.
  • Fixed vs. variable interest rates: A fixed interest rate won’t change during the life of the loan. Variable interest rates are usually lower and fluctuate based on market indexes, which means your minimum payments can go up and down as well. All federal loans have fixed interest rates. 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 during which you don’t need to make loan payments. When the grace period ends, you have 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 creditworthy cosigner can help improve your likelihood for loan approval and you may receive a lower rate.

Undergraduate Federal vs. Private Student Loans

  Federal Private
Lender Government A financial institution like a bank or credit union
Subsidized? Sometimes, based on financial need No
Interest rates Fixed rates are set every July 1 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, a percentage of the loan amount set every October 1 Generally, lenders do not charge one
Repayment options Repayment plans range from 10 to 25 years Depends on the lender and with fewer options than federal loans
FAFSA® required? Yes No

All about federal student loans

Federal student loans are made by the federal government. If you’re a student borrowing for undergrad, you have two options: subsidized loans (which are based on financial need) and unsubsidized loans. The main difference is that with a subsidized loan, the government pays the interest that accrues during school, deferment, and grace periods, while with unsubsidized loans, you’re responsible for paying that interest. (And if you don’t pay it before the grace period ends, it gets capitalized, which means it is added to the principal loan amount.) Interest rates on 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 jobs or fields, there is the possibility of having your loans forgiven (i.e., wiped out) if you meet certain eligibility criteria.

To apply for a federal loan, you must fill out the Free Application for Federal Student Aid (FAFSA) each year you are in school. The application is available on October 1st each year.

All about private student loans

While the government issues federal student loans, private student loans are made by financial institutions like banks or 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/or the creditworthiness of your cosigner, and those rates can be fixed or variable. Repayment plans also vary by lender and are more limited than with federal loans. And with very few exceptions, private student loans generally don’t have loan forgiveness.

To apply for a private student loan, submit an application directly with a specific lender.

Getting a private student loan

Private student loans can be a good option to bridge the gap between federal student loans and total college costs. Discover® Undergraduate Student Loans offer great rates and zero fees. You can also earn cash rewards for good grades, and get an interest rate reduction while enrolled in automatic payments


FAFSA® is a registered trademark of the US Department of Education and is not affiliated with Discover® Student Loans

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