Federal vs. Private Student Loans: Which Is Right for You?

Federal and private student loans each have their own benefits, costs, and eligibility requirements. Federal loans are issued by the government and typically offer lower interest rates, more repayment options, and easier qualification. About 87% of all student loans taken out in the 2023-24 school year were federal, according to the College Board.

Private student loans are issued by banks and other financial institutions. They may help you cover more college costs, but they generally come with stricter eligibility requirements and higher interest costs.

Current private student loan rates

Learn more about the differences between federal and private student loans and what to consider if you're planning to borrow.

What are federal student loans?

Federal student loans are issued by the U.S. Department of Education to help students cover the cost of higher education at eligible schools. They're usually more affordable than private loans and come with benefits like flexible repayment options and fixed interest rates.

There are four main types of federal student loans:

• Direct Subsidized Loans: These loans are for undergraduate students with financial need. Subsidized loans don't accrue interest while you're in school at least half-time and during a six-month grace period after you leave school. Financial need is required, but credit is not a factor.
• Direct Unsubsidized Loans: These loans are available to undergraduate and graduate students, regardless of financial need. Your school determines the amount you can borrow, and there are annual and lifetime limits. Unlike subsidized loans, you're responsible for all accrued interest.
• Grad PLUS loans: Designed for graduate or professional students, grad PLUS loans allow you to borrow up to the full cost of attendance. To qualify, you must not have an adverse credit history and must attend a participating school.
• Parent PLUS loans: These loans are available to parents of dependent undergraduate students enrolled at least half-time. To qualify, you need to meet general eligibility requirements for federal aid and have no adverse credit history.

What are private student loans?

Private student loans are issued by banks, credit unions, state agencies, or even some schools. Unlike federal loans, private lenders set their own terms, including interest rates, repayment options, and eligibility criteria.

Private loans often come with higher interest rates and fewer borrower protections compared with federal student loans. For example, private loans typically don't offer income-driven repayment plans, loan forgiveness options, or automatic deferment during times of financial hardship.

Private student loans can be a good option if you've maxed out your federal aid or need additional funding for expenses like tuition, housing, or other education-related costs. However, you'll probably need a strong credit history — or a cosigner with good credit — to qualify for competitive terms.

Key differences

Eligibility requirements

Federal student loans are easier to qualify for and don't require a credit check, except for parent PLUS and grad PLUS loans. Private student loans, however, typically require a good credit score — usually a FICO score of 670 or higher — or a cosigner to secure approval. If you have bad credit or little credit history, your options may be limited.

“Federal student loans often have an easy barrier to entry, but private student loans can be a little harder to get because [many lenders] are for-profit companies,” says Ian Bloom, a financial life planner and owner of Open World Financial Life Planning. “They are evaluating their risk on each individual borrower.”

Interest rates

Federal student loans always have fixed interest rates, which means your rate stays the same throughout the life of the loan. Rates are set annually by Congress and tend to be lower than what private lenders offer, especially for undergraduate borrowers.

Private student loans, on the other hand, may come with either fixed or variable interest rates. Fixed rates stay constant, while variable rates can fluctuate over time based on market conditions-potentially starting lower but increasing later. Private loan rates depend on factors like your credit score, cosigner qualifications, and the lender's policies, making them more personalized but often less predictable.

Both federal and private student loan interest may qualify for a student loan interest tax deduction.

Repayment terms

Federal student loans provide flexible repayment options designed to accommodate a variety of financial situations. These include income-driven repayment plans, which adjust your monthly payments based on your income and family size, and extended repayment plans that can last as long as 25 years. You can also switch repayment plans at any time if you need to.

Private student loans generally offer fewer repayment options, and terms vary by lender. Repayment terms often range from five to 20 years, and some lenders may allow interest-only payments, fixed monthly payments, or full deferment while you're still in school. However, once you select a repayment term, it's typically locked in unless you refinance your student loans with another lender.

Loan forgiveness

Federal student loans offer multiple forgiveness programs like Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness (TLF), and forgiveness through income-driven repayment plans. Your federal debt can also be discharged in specific situations.

“Federal student loans have protections if your school defrauds you or you become disabled,” says Betsy Mayotte, president and founder of the Institute of Student Loan Advisors. “That doesn't exist with private loans.”

Private student loans are not eligible for federal loan forgiveness programs. While some lenders may provide temporary relief through deferment or forbearance during financial hardship, these benefits vary widely by lender and are not guaranteed.

Pros and cons of federal student loans

Pros

Federal student loans offer many benefits, particularly for borrowers who need flexibility and protection. Because of this, federal student loans are usually better options, says Bloom.

• Lower interest rates: Rates are consistent and may be lower than those offered by private lenders, depending on your circumstances.
• Subsidized options: For those with financial need, the government may pay your interest while you're in school, during your grace period, and during deferment.
• Income-driven repayment plans: You can tie your monthly payment to your income, making payments more manageable.
• No credit check (except for PLUS loans): Most federal loans are accessible without requiring a credit check, which makes them easier to qualify for.
• Deferment and forbearance: Borrowers experiencing financial difficulties may temporarily pause or reduce payments.
• Loan forgiveness options: Federal loans may be forgiven under a number of circumstances. For example, if you work in public service, as a teacher in a low-income school, or if you become permanently disabled.

Cons

• Borrowing limits: Federal loans have annual and lifetime limits that may not cover your full education costs.
• Potentially higher rates for strong credit borrowers: If you or a family member has excellent credit, private loans may offer lower rates.

Pros and cons of private student loans

Pros

• Higher borrowing limits: Private lenders may let you borrow enough to cover all your education expenses, including those beyond tuition.
• Cosigner options: Adding a cosigner can increase your chances of approval and help you qualify for better terms.
• Potentially lower rates for excellent credit: Borrowers with strong credit may secure lower rates than those offered by federal loans.

Cons

• Credit-based approval: Approval depends on your or your cosigner's financial profile, which can limit options for borrowers with poor credit.
• Less flexibility: Private loans don't usually offer income-driven repayment, extended terms, or other protections available with federal loans. Defaulting on a private loan can also severely damage your credit.
• No loan forgiveness: Private loans lack forgiveness programs, leaving borrowers fully responsible for repayment regardless of their circumstances.

Which type of loan should I take out?

Experts like Mayotte and Bloom recommend prioritizing federal student loans first. They generally come with lower interest rates, flexible repayment options, and borrower protections that private loans lack. After exhausting federal loan options, you can consider private loans if you need more money to cover your education costs.

Start by completing the Free Application for Federal Student Aid (FAFSA) to determine your eligibility for financial aid. Once your school processes your FAFSA, you'll receive a financial aid offer that may include federal student loans and gift aid like grants or scholarships.

“It's important to understand what the type of loan you're receiving is and what the trade-offs are,” says Bloom. “If you get a parent PLUS loan for your kid, that loan is actually against your credit and owned by you. It's important that you make those payments and don't just assume that your student is taking care of it.”