Comparing Private Student Loans vs. Federal: Which Is Better for Borrowing?

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If you’re planning on borrowing money for college, you’ll have plenty of company.

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Nearly 46 million Americans hold $1.75 trillion in student loans. Before you take on what could be decades of debt, it’s important to understand the many key differences between your two primary choices: federal student loans and private student loans.

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

Both federal and private student loans must be paid back with interest whether or not you ever graduate from college. The interest you pay on both kinds of loans might be tax-deductible. Beyond that, the differences outweigh the similarities.

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The main distinction is that the federal government funds federal student loans and lenders like credit unions, banks, state agencies and colleges themselves fund private student loans. 

There are four kinds of federal student loans:

  • Direct subsidized loans: These loans offer better rates to undergraduate students who can demonstrate need. 
  • Direct unsubsidized loans: Undergrad and graduate students can apply without having to demonstrate need.
  • Grad PLUS Loans: These are specifically for graduate and professional students.
  • Parent PLUS Loans: These are special loans issued to a student’s parents. 
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Apply For Federal Loans First

One of the other key differences is that you have to apply for federal student loans through the Free Application for Federal Student Aid (FAFSA). The 2021-2022 academic year deadline for submitting all FAFSA paperwork is 11:59 p.m. Central Time on June 30. All updates and corrections are due by Sept. 10. For the 2022-2023 academic year, the deadlines are 11:59 p.m. Central Time on June 30, 2023, and all updates and corrections are due by Sept. 10, 2023. FAFSA determines your borrowing limit, which may not cover the cost of attendance, and FAFSA also determines your eligibility for other government aid like work-study and grants.

With private loans, on the other hand, you apply directly through the lender and the lender determines your borrowing limit without regard to need. In most cases, a co-signer with good credit will help students secure private loans. That’s not the case with federal loans.

Generally speaking, you should consider private loans only after you’ve exhausted not just federal loans, but grants, scholarships and other awards. That’s partly because — unlike with FAFSA’s deadlines — you can apply for private loans as late as you want, provided the lender has enough time to process the loan. More importantly, you should line up federal loans first because they tend to be more flexible, more straightforward and more affordable than private student loans, which you should generally only use to fill in funding gaps at the end.

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There’s a Lot To Like About Federal Student Loans

With private loans, the lender sets the terms and conditions, which vary from loan to loan, lender to lender and borrower to borrower. With federal student loans, on the other hand, the terms and conditions are set by law and never change. Not only are federal loans usually less expensive — the current interest rate is 3.73% for undergraduate student loans — but they offer a bunch of perks and benefits that most private loans can’t match, including:

  • Fixed interest rates, as opposed to private loans, which might charge fixed- or variable-rate interest.
  • Income-driven repayment plans, which adjust your monthly payment based on what you earn.
  • Deferred payments, which you don’t have to start making until after you graduate. Private loans can be deferred, but in many cases, you have to begin paying while you’re still in school. 
  • Subsidization — If you can demonstrate need, the government will pay your interest while you’re in school. Private loans, on the other hand, are never subsidized.
  • With the exception of PLUS loans, there is no credit check with a federal student loan. In almost all cases, private lenders will check your credit and set your rate accordingly. 
  • Multiple federal loans can be bundled into one fixed-rate Direct Consolidation Loan. Private student loans cannot, although they can be refinanced. 
  • With federal loans, students can change their repayment plans even after they’ve finalized their loan.
  • Students who work in public service might have some portion of their federal loans forgiven.

Parent Loans Are Somewhere in Between

One of the two types of Direct PLUS loans, Parent PLUS loans have some, but not all of the advantages of federal student loans. For example, parents who borrow money through these federal loans can defer making payments until their child leaves school, just as if the student had taken out the loan.

Although the interest rate is fixed like a student loan, parent loans are never subsidized — the borrower is responsible for all the interest. That interest, however, is usually still tax-deductible and multiple loans can be combined into a Direct Consolidation Loan. Just like students, parents who work in public service might have some of their loans forgiven, as well.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.

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