Types of Student Loans: Federal vs. Private

There are two main types of student loans: federal student loans, issued by the U.S. Department of Education, and private student loans, issued by banks, credit unions, and online lenders. 

During the 2025-26 academic year, tuition and fees for full-time undergraduate programs ranged from $11,950 to $45,000, according to College Board data. With rising tuition costs, paying out of pocket is a challenge for many students and families.

Student loans can help, but it’s important to understand the different types of student loans available before you borrow.

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What are the two main types of student loans?

Both federal and private student loans can help you pay for college, but they have different benefits and drawbacks. 

Federal student loans have fixed rates set by Congress annually in July, using a formula tied to the 10-year U.S. Treasury. They typically don’t have minimum credit requirements, with the exception of Direct PLUS Loans. Private student loans have fixed or variable rates and are available through banks, credit unions, and online lenders. Lenders have credit requirements for approval, and some borrowers need a cosigner to qualify. 

“Borrowers usually tap federal loans first to foot the bill for the cost of attendance as they often come with more consumer protections, different repayment plan options, and potential pathways to forgiveness like PSLF,” says Becca Craig, certified student loan professional and certified financial planner at Focus Partners Wealth. 

“Private loans typically have fewer protections and less flexibility if a borrower runs into trouble,” she adds.

Types of federal student loans

Federal student loans offer strong borrower protections and benefits, including income-driven repayment options, deferment, forbearance, and the potential for student loan forgiveness. But accessibility is changing, which will likely impact how borrowers pay for college. 

“With the One Big Beautiful Bill Act tightening federal loan availability, private loans are going to become a much more common piece of how families cover the full cost of education going forward,” says Craig. 

There are four different types of federal student loans, including: 

Direct Subsidized Loans

Direct Subsidized Loans are available to undergraduate students with a financial need. The federal government pays the interest while you're enrolled at least half time, during your six-month grace period, and during deferment. 

Annual limits are calculated by your year in school: $3,500 as a first-year student, $4,500 the second year, and $5,500 for each remaining year, with a $23,000 aggregate cap. Because interest doesn't accrue while you’re in school, subsidized loans should be your first choice if you qualify.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to eligible undergraduate, graduate, and professional students with no requirement to show financial need. Borrowers are responsible for interest once the loan is disbursed, so making even small interest-only payments while you’re in school prevents interest from accumulating and increasing your student loan debt.

Annual limits are set depending on whether you’re an independent or dependent student.

As of July 1, 2026, graduate students have a $100,000 lifetime limit (decreased from $138,500), while programs that are classified as professional have a lifetime cap of $200,000 (increased from $138,500).

Direct PLUS Loans 

Direct PLUS Loans are federal loans for parents of dependent undergraduates and have been historically available to graduate and professional students. The One Big Beautiful Bill Act changed both on July 1, 2026.

Graduate and professional students who borrowed for their program before July 1, 2026, can no longer take out a grad PLUS loan. Students are limited to borrowing Direct Unsubsidized Loans, up to the new graduate caps. Any funding gaps must come from private lenders, savings, or institutional aid.  

Parent PLUS loans are still available to parents and guardians of dependent undergraduates, however, the loan limits have changed. As of July 1, 2026, parent PLUS loans are limited to $20,000 per year per student with a $65,000 lifetime limit per student. However, if you took out a federal Direct PLUS Loan for a specific program before July 1, 2026, you can continue to borrow under the old rules for up to three years, as long as you (or the student) stay continuously enrolled in that same program. 

Direct Consolidation Loans

Direct Consolidation Loans allow borrowers with existing federal debt to pay it off using a new federal consolidation loan. These loans can combine multiple federal student loans into one to streamline repayment and can open up the door to new repayment options. 

Types of private student loans

Private student loans come from banks, credit unions, and online lenders. Unlike federal student loans, they’re not standardized, so loan options vary by lender. Eligibility requirements, interest rates, and repayment terms vary based on the type of private loans and the lender.

Some common private loan types include:

• Undergraduate student loans: These are private loans designed for borrowers pursuing an undergraduate degree. 
• Graduate student loans: These loans are for students pursuing a graduate degree. Demand for private graduate student loans is expected to increase since the federal grad PLUS program has been phased out.
• Parent student loans: Parents can use private parent student loans to help their children pay for college. With new caps on federal parent PLUS loans, more parents may rely on private loans to cover funding gaps. 
• Degree or career-specific student loans: Some private lenders offer degree or career-specific student loans, such as medical- or flight-school loans.

How do you choose the right type of student loan?

The right type of student loan depends on your school costs and how much aid you qualify for. Follow these steps to build a funding plan that fits your situation: 

1. Determine your financial needs: Find out how much you must borrow to cover the full cost of attendance. 
2. Prioritize free money: Take advantage of scholarships and grants first before borrowing. 
3. Submit the FAFSA: Fill out the Free Application for Federal Student Aid (FAFSA) and provide your financial information to determine whether you qualify for grants, work-study, and federal student loans. Complete it online with the Department of Education by the annual deadline. 
4. Max out federal student loans: Federal student loans offer borrower benefits like income-driven repayment and the potential for student loan forgiveness. Most don't require a credit check, have fixed rates, and provide deferment and forbearance options. As a result, it's a good idea to max out these loans first. 
5. Review gaps in funding: Federal student loan limits may prevent you from borrowing the full amount you need. Private student loans can cover shortfalls, but they should be your last option after you’ve exhausted federal loans. 
6. Research lenders: Comparing multiple private student loan lenders will help you find the best terms. First, consider eligibility requirements like minimum credit score and income. If you're eligible (with or without a cosigner), review interest rates, fees, repayment terms, and borrower benefits. 
7. Choose a fixed or variable rate: Borrowers can choose between fixed- or variable-rate private student loans. Fixed rates offer stability while variable rates result in your monthly payments changing over time. 
8. Apply for private loans: Submit an application for private student loans and consider adding a cosigner to get the best rates.

How can you reduce the amount you need to borrow?

While student loans can help pay for college, they come with thousands of dollars in interest costs, so you should limit borrowing. Here are some tips to help: 

• Apply for scholarships: Scholarships may be available based on your academics, achievements, artistry, or athleticism. 
• Avoid overborrowing: “You don’t have to accept the full amount offered. The primary driver that affects the monthly payments and total interest usually isn’t the interest rate or loan terms, but the actual amount that’s borrowed, known as the loan principal,” says Jordan Banning, certified financial planner (CFP) and founder of Crafted Financial Planning. “Generally, the less you take in student loans, the bigger the impact on your long-term financial success.”
• Consider community college: You may want to start school at a 2-year college to borrow less. “It can be very cost effective to complete general courses at community college and then transfer to a university,” Banning adds.
• Work part time: Consider a part-time job to earn income to pay everyday expenses. 
• Live at home: If it’s a possibility, you can save a substantial amount by living with family. 
• Make interest-only payments: You can lower total borrowing costs on private and unsubsidized federal loans by making interest-only payments while in school instead of deferring repayment. 

How you can prepare to repay student loans

It's important you understand your repayment options before borrowing.

“The decision to take out a student loan is only the beginning, and a borrower's repayment strategy matters just as much,” says Craig. 

“The type of loan, federal or private, and the repayment options available, whether through income-driven plans or a traditional fixed schedule, can shape everything from monthly cash flow to career flexibility to long-term peace of mind for years, if not decades, after graduation,” he adds.

To prepare for repayment, borrowers can: 

• Create an FSA account: Start by creating a Federal Student Aid (FSA) account, where you can manage repayment plans and find your federal loan information. 
• Confirm loan details: Confirm your loan balances and rates using your FSA account or online accounts with private lenders. You can also see your loans listed on your credit report at AnnualCreditReport.com. 
• Try the Repayment Calculator: Use the FSA Repayment Calculator to determine potential monthly payments under each federal repayment plan. 
• Check contact info: Confirm your loan servicers have your current contact info, including your phone number and email and mailing address. 
• Sign up for auto pay: Auto pay can help you pay on time and could make you eligible to lower your interest rate by 0.25 percentage points.