Federal Vs. Private Student Loans: 8 Differences

There are two main categories of student loans to choose from: federal loans, which are offered by the federal government, and private loans, which are originated by banks, credit unions and online lenders.

Federal student loans come with far more benefits than private loans do, making them the best choice for most people. But federal student loans also come with annual limits, which means some borrowers may pursue private student loans to make up for a gap in college funding.

Here’s what you should know about federal vs. private student loans, and how to decide which option is best for you.

1. You Must Submit the FAFSA to Get Federal Loans

The golden rule of financial aid is that you must fill out the Free Application for Federal Student Aid (FAFSA) to access federal student loans, grants, work-study and other forms of support. The FAFSA is available each Oct. 1 for the following school year, and it collects financial and family information so that the government can determine how much federal student aid you’re eligible for.

Fill out the FAFSA as early as possible, since some types of federal, state and school grant funding are first-come, first served. You don’t need to submit the FAFSA to receive a private student loan, though you’ll have to fill out an application that includes credit, income and other financial and personal information for you and your co-signer, if you need one.

2. Federal Student Loans Generally Have Lower Interest Rates

Interest adds to the overall cost of your loan, and for many borrowers, the interest rate is the deciding factor in which loan to choose. Here, almost every time, federal student loans win out over private loans. That’s because anyone who takes out a federal student loan gets the same low, fixed rate—meaning it doesn’t change over time—regardless of credit score or income.

For the 2022-23 school year, rates on federal subsidized and unsubsidized student loans for undergraduates is 4.99%. By contrast, fixed rates on private loans for undergraduates start at 2.99% on Forbes Advisor’s list of the best private student loans—and the highest possible rate is 13.95%.

Students with little or no credit history and borrowers with less-than-excellent credit particularly stand to benefit from low federal loan rates. That’s because private loans always require a credit check, and a co-signer is often needed to qualify or get lower rates in these circumstances.

One thing federal loans have that many private loans don’t? An origination fee. Federal subsidized and unsubsidized loans come with an origination fee of 1.057% of the loan amount, deducted from the loan proceeds when they reach your bank account. The best private loans don’t charge origination fees—but their higher rates often counteract the fee savings.

3. Federal Student Loans Have More Borrower Benefits

The consumer protections you’ll enjoy as a federal student loan borrower are just as important as the amount you’ll save on interest. These include:

• Up to three years in deferment and forbearance if you experience an economic hardship
• No interest accrual while in school, during your grace period and while your loans are in deferment if you have federal subsidized loans
• Guaranteed six-month grace period after you graduate or leave school before monthly payments begin
• A wide range of repayment plans to choose from, including graduated and extended repayment
• Income-driven repayment (IDR) options if your loan balance is high relative to your income
• Student loan forgiveness if you choose an IDR plan or you qualify for career-based loan cancellation programs such as Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness
• 270 days before loans go into default due to nonpayment; private loans can go into default much sooner

Particularly if you’re considering a career that leads to low or irregular income, federal loans provide multiple opportunities for limiting or pausing payments. Private student loans, on the other hand, may offer only 12 months of forbearance instead of three years, or few chances to lower monthly payments over the long term. In nearly all cases, private lenders also do not provide forgiveness to borrowers in certain careers or who choose certain repayment plans.

4. Federal Student Loans Come With Greater Disaster Relief

During the Covid-19 pandemic, federal loan borrowers are receiving unprecedented repayment relief through automatic forbearance and an interest rate cut. Between March 2020 and September 2021, the federal government is requiring no monthly payments and has slashed interest rates to 0% for borrowers in repayment. That means that during the forbearance period, borrowers’ loan balances will not grow.

Many private lenders have offered relief in the form of a special Covid-19 forbearance, but it’s typically available in three-month increments only. Interest on private loans continues to accrue.

5. Most Federal Student Loans Aren’t Credit-based

Subsidized and unsubsidized federal loans require no credit check meaning any college student can qualify.

However, PLUS loans for graduate students and parents do come with credit requirements: Borrowers must show that they have no “adverse credit history,” meaning they do not have unpaid debts totaling more than $2,085 and have not experienced bankruptcy, foreclosure or other issues in the past five years. Federal PLUS borrowers with credit concerns can get a loan, though, either by sufficiently explaining any credit issues or applying with a co-signer.

Private lenders, by comparison, perform a much more substantial credit check on all applicants. They can either reject a borrower or charge higher interest rates if the applicant’s credit score, income, cash flow and other factors do not meet their standards.

6. Undergraduate Federal Student Loans Have Low Loan Maximums

Undergraduates can borrow only up to $31,000 in subsidized and unsubsidized loans throughout college if they’re considered financially dependent on their parents, or $57,000 total if they’re considered financially independent. (The government makes a dependency determination based on information in the FAFSA.) Graduate and professional students can borrow up to $138,500 total, including loans used for undergraduate programs.

This may feel restrictive if you need more than that to attend your dream school. But consider limiting your total student loan borrowing to these federal loan maximums. That can help you keep your monthly debt payments affordable when you graduate.

PLUS loans for parents and graduate students have higher limits: You can borrow up to the school’s cost of attendance. But PLUS loans come with higher interest rates (5.3% for 2020-21) and fees (4.228%) than other federal loan types, making it expensive to rely on these loans. It’s best to avoid them if possible. However, they can be a good alternative to private loans if you need more money for school and want access to federal loan benefits.

7. Private Student Loans Offer Variable Interest Rates

Unlike federal loans, most private lenders give borrowers the option to choose between fixed and variable interest rates. Variable rates often start off lower than fixed rates, especially during periods of low rates across the board, but they can rise over time.

For the average student, fixed rates are the safer bet. But if you have stable income and plan to pay off a student loan quickly, it can be beneficial to choose a variable rate and pay down the loan while rates are low, avoiding potential increases in the future.

8. Private Student Loans are Safer to Refinance

Student loan refinancing is only available through private companies, which means refinancing a federal loan turns it into a private loan. You’ll lose access to IDR, forgiveness, generous deferment periods and other advantages.

But since private student loans often have fewer protections and higher rates, it’s particularly wise to consider refinancing them once you have a good or excellent credit score and stable income. By refinancing, you have the chance to secure a lower rate, saving you a potentially significant amount of money throughout your repayment term.