Types of Student Loans: Federal vs. Private and How To Choose

College can be expensive, and many families have to rely on student loans to cover the cost. In the 2024-25 school year, families of undergraduate students spent an average of $30,837 on college, with nearly half of families borrowing to pay for it, according to a 2025 study from Sallie Mae.

As you're preparing for college, it's important to understand what student loan options are available to you. This article explains how federal and private student loans work, and how to determine the best student loans for your situation.

Current private student loan rates

What are the main types of student loans?

There are two main types of student loans you can pick from — federal and private loans. The main difference between the two is that federal student loans are offered by the Department of Education, while private loans are offered by banks, credit unions, and online lenders.

“Federal student loans have fixed interest rates and can be subsidized for students with financial need,” says Chad Cummings, a certified public accountant (CPA) and attorney at Cummings & Cummings Law, which focuses on wealth preservation.

“Private student loans have interest rates determined by creditworthiness. With excellent credit or a strong cosigner, a private loan's rate might be similar to federal rates, but many borrowers will pay a higher rate on private loans,” he explains.

Because the government provides federal loans, they come with many unique benefits. They have low, fixed interest rates, no credit score requirements, and offer access to loan forgiveness. You can also apply for hardship options like deferment and forbearance.

However, federal student loans have annual and aggregate limits, and they don't always cover the full cost of college. This is why many borrowers supplement with private loans.

Private student loans can have fixed or variable interest rates, and you must pass a credit check to qualify. Since each lender can set its own terms, private loans tend to be less flexible than federal loans.

What types of federal student loans are available?

There are four main types of federal loans available to borrowers:

• Direct Subsidized Loans: Direct Subsidized Loans are for undergraduate students who demonstrate financial need. The Department of Education covers the interest while you're enrolled in school at least half-time and for the first 6 months after graduation. But you can only borrow up to $5,500 per year, depending on your year in school and dependency status.
• Direct Unsubsidized Loans: Direct Unsubsidized Loans are available to all undergraduate and graduate students, regardless of financial need. The main difference between subsidized and unsubsidized loans is that with unsubsidized loans, you're responsible for paying any interest that accrues on the loan. You can borrow up to $20,500 annually, minus any subsidized loans you received during the same period, depending on your year in school and dependency status.
• Direct PLUS Loans: Direct PLUS Loans are available to graduate students and parents of dependent undergraduates. You can borrow up to the full cost of attendance at your school, minus other financial aid you've received, and a credit check for adverse credit is required.
• Direct Consolidation Loans: Direct Consolidation Loans combine multiple federal loans into one. These loans can simplify and lower your monthly payments, but they can also extend your repayment timeline and increase the amount of interest you pay.

What are private student loans?

Private student loans are offered by private lenders like banks and credit unions. They can have fixed or variable interest rates and lack the flexible repayment terms and borrower protections provided by federal loans.

The rates and terms you receive are based on your credit score and other financial details, like your income. For this reason, many borrowers must add a cosigner to their application to qualify or receive better terms. While it's usually best to take advantage of federal loans first, private loans can be useful to cover any funding gaps left after maxing out your federal aid.

How do federal and private student loans compare?

“The way I describe the difference between a federal loan and a private student loan is whether the borrower wants options up front, or options on the back end,” says Jack Wang, a wealth adviser and college planning strategist.

“Private loans allow for a broader range of choices, such as who will be the borrower or cosigner, type of interest rate, and loan repayment term. Federal loans all carry the same terms up front, but have more options during repayment,” he adds.

The chart below highlights some of the key differences between federal vs. private student loans.

Which student loan type is best for you?

The loan type that's best for you depends largely on your financial situation and the type of student you are:

• Undergraduate students: If you're an undergraduate student, start with subsidized loans if you qualify. This will help you minimize the amount of interest that accumulates while you're still in school. If you've maxed out subsidized loans, consider taking out unsubsidized loans.
• Graduate students: Grad students should generally consider unsubsidized and PLUS loans first. Both loan types likely come with lower interest rates than what you'd receive from a private lender, and grad PLUS loans can cover the full cost of attendance.
• Parents: Parents who are borrowing to cover their child's tuition can take out either parent PLUS loans or private parent loans. If you have an excellent credit score and a steady income, you could receive lower rates with a private lender.
• Students with aid gaps: Once you've maxed out your federal loan options, you can explore private loans. Just make sure to shop around and compare rates and terms from at least a few different lenders.