Federal vs. Private Student Loans: What’s the Difference?

Student loans for college come in two main forms: federal and private. Federal loans are issued by the government, while private lenders like banks or online lenders originate private loans.

These two loan types have different repayment plans, interest rates, and forgiveness options, so it’s important to understand the details before you borrow.  

“For most families, the federal Direct Loan for students is usually the best place to start,” says Peg Keough, director of education at College Aid Pro, a college-planning software company.

This guide explains the differences between federal vs. private student loans and how to determine which is right for your situation.

Current private student loan rates

What are federal student loans?

Federal student loans are issued by the U.S. Department of Education. To qualify, you need to fill out the Free Application for Federal Student Aid (FAFSA) and meet certain eligibility requirements for federal financial aid.

Federal student loans are the more common type of education loan. They’re popular because they come with important borrower protections, and you don’t need a credit check, proof of income, or cosigner. The government offers several different federal student loans for undergraduate students, graduate and professional students, and parents:

• Direct Subsidized Loans: These loans are available to undergraduate students who demonstrate financial need on the FAFSA. The government pays the interest while you’re enrolled in school and for a 6-month grace period after graduation, leaving school, or dropping below half-time.
• Direct Unsubsidized Loans: These loans are available to undergraduate, graduate, and professional students regardless of financial need. Unlike the subsidized loan, you’re responsible for the interest that begins accruing when the loan is disbursed. If you don’t pay the interest while in school, it gets added to your balance when you begin repayment.
• Direct PLUS Loans: These loans are available to graduate and professional students or parents of dependent undergraduates. You’ll need to prove that you don’t have an adverse credit history through a credit check — otherwise, you must meet additional requirements.

Benefits of federal loans

Federal student loans offer several advantages that private student loans don’t, including a greater number of flexible repayment plans, forgiveness programs, and more ways to rehabilitate your loan if you default. 

“I usually recommend people take the federal loans for these reasons,” says David Gourley, founder of K-12 Planning, a financial services firm for teachers. “Private loans have fewer restrictions, and lenders can take bigger action against you if they decide to.”

These are key benefits of federal student loans:

• Fixed interest rates: Federal loans come with low, fixed interest rates determined by the government. Rates vary by loan type, but every borrower gets the same rate for the same loan type. The following rates apply to loans disbursed on or after July 1, 2025, and before July 1, 2026:
  • Direct Subsidized and Unsubsidized Loans (undergraduates): 6.39% 
  • Direct Unsubsidized Loans (graduate and professional students): 7.94% 
  • Direct PLUS Loans (parents and graduates/professional students): 8.94%
• Income-driven repayment plans: If you can’t afford the Standard Repayment Plan, you may qualify for an income-driven repayment plan that ties your payment to your income (generally 10% to 20% of your discretionary income). Your loan balance is forgiven after you meet the loan payment term (20 or 25 years, depending on the plan).
• Forgiveness programs: These include Public Service Loan Forgiveness in as few as 10 years, Teacher Loan Forgiveness, and income-driven repayment plan forgiveness.
• Deferment and forbearance: If you encounter a financial hardship, lose a job, or become ill, you may be able to defer your loan payments for a short period until you get back on your feet.   

What are private student loans?

Private student loans are available through banks, credit unions, and online lenders. Loan terms vary by lender, and loans may have a fixed or variable rate that’s determined by your credit. 

Unlike federal loans, private loans typically don’t have an origination fee (a fee deducted from the loan amount up front), and borrowers with excellent credit may get a favorable interest rate. But “rates can be all over the place — even in the 13% to 15% range,” says Gourley. “They’re based on your credit history, your cosigner’s credit history, and the amount you take out.”

Lenders require a credit check and, for most borrowers, a cosigner if the borrower doesn’t have a long credit history. This makes borrowing more complicated for most students, as your cosigner is equally responsible for your loan. 

“Some private student loans will release a cosigner after a certain number of on-time payments, but you’ll need to look at the details,” says Keough.

Private loans don’t offer any kind of forgiveness pathway or income-driven repayment plans. Missed payments can lead to late fees, higher interest, and may hurt your credit if your lender reports them to the credit bureaus.

However, for some parent borrowers with stellar credit, “a private loan may be better than a parent PLUS loan with an 8.94% interest rate and 4.228% origination fee,” says Keough.

Side-by-side comparison: Federal vs. private loans

When to choose a federal student loan

Experts recommend starting with federal student loans because they have more favorable interest rates and don’t require a cosigner, proof of income, or a minimum credit score. If you qualify for a Direct Subsidized Loan, the government pays the interest while you’re in school. No private loan will offer a subsidy. Other consumer protections, such as flexible repayment plans, forgiveness programs, discharge for disability or death, and a longer grace period to rehabilitate a defaulted loan, also benefit you.

“I typically suggest people take the federal loans first for the flexibility,” says Gourley. “You can always explore refinancing to private loans later.”

When to choose a private student loan

Federal student loans come with annual borrowing limits, and they may not cover enough of your college bill. If you’ve maxed out federal borrowing, you may need a private student loan to cover the gap.

After graduation, refinancing to a private loan can make sense for some borrowers if the goal is to pay off loans early. 

“Let’s say you know you’re not going into a public service role, and your goal is to pay off your loans as quickly as possible and minimize interest,” says Gourley. “That’s when I help people explore what a private loan and interest rate look like with their credit history.”

The alternative to taking private loans is choosing a more affordable college from the outset if possible, according to Keough. She recommends that families “start looking at affordability and how financial aid works when students are sophomores or juniors in high school.”

How to combine federal and private student loans

You can take out both types of loans, and many people do. During the 2024-25 academic year, 48% of undergraduate students borrowed for college, according to Sallie Mae’s 2025 report, How America Pays for College.

To combine federal and private loans, start by maximizing federal student aid, and then compare private lenders by first prequalifying online. After you’ve gotten a few rate quotes, decide which lender offers the loan features you want before formally applying.