Private Student loans vs Federal Student Loans: What's the difference?

This article gives a overview of student loans, federal and private student loans, distinguishing factors between federal and private student loans, pros and cons of both federal and private student loans.

Updated by Kanishkar P on 5th August 2020

College and Higher education open up your path towards growth, good job and success in your life. But you will have to pay to afford it. Paying for college is a significant financial priority for many people, but the ever-increasing cost for higher education is beyond many people’s financial reach. If you don’t have any savings or investments, you will have to search for options to cover your study expenses.

You have got different ways to deal with your college tuition, you can apply for scholarships, grants or student loans. When you do not qualify for scholarships and grants, then your final option would be student loans. Even in student loans, you have got two major options. One is the Federal Student Loan and the other is a Private Student Loan. The purpose of this article is to make you understand the key characteristics of Private and Federal student loans, and their aspects of difference. 

Table of contents


Student Loans

To pay your study expenses you need to seek the available options. When you are denied scholarships and grants, the only option left with you is the student loan. A student loan is an amount that you can borrow from a lender and needs to be repaid over a specific period of time. The lender may be Federal Government, an organization, a bank or a financial institution.

The student loan will be useful in covering your tuition fees, expenses on books and preparatory materials, and living expenses. It is your responsibility to select the type of loan based on your requirements and feasibility. Getting a loan from a lender may be easy, but selecting a suitable type of loan and an appropriate lender is a bit hard and is very important.    

Compare your options before choosing, to get the best among available.

And also have a clear knowledge about the student loans to make sure that you don’t get into any risks in the future. 


Federal Student Loans

When it comes to student loans, the first option suggested is the Federal Student loan because of the benefits offered in favor of the students. Federal Student Loans are the student loans offered by the federal government. These loans are got by the government or from private sources. 

Most importantly, when applying for most of the student loans, you will have to fill FAFSA.

The Free Application for Federal Student Aid(FAFSA) is a form that is used to award financial aid from the government, states, colleges and other organizations. Filling FAFSA should be your first and foremost job if you are planning to join college, you can even fill it when you are in college. This form helps you get access to grants, scholarships, work-study programs, and federal student loans. 

There are different plans offered to the students to repay the student loan. You can select among them depending on your income or opt to standard methods.

Under Federal student loans, you also get a temporary relaxation period during the repayment term. Explore Federal Student Loans if you are planning to apply for it.  


Private Student Loans

Private Student loans are the student loans offered by private lenders. FAFSA is not needed to apply for a private student loan, instead, you have to apply for each of the private loan moneylenders. Private lenders may be banks, credit unions, online lenders. Private student loan option comes after the federal student loan.

You might be in a situation where the Federal Student Loan is not sufficient to meet the expenses of your college. In such cases where you have exhausted your federal student loans, you have to seek private student loans. This loan helps you to cover up the expenses related to your undergraduate or graduate program.

You can find a number of private lenders who provide student loans. To qualify for a private student loan you need to have proof of income and a good credit score. As a student, you might not have those relevant proofs, so you can apply with a cosigner who has good credit scores.

In the private student loans, the repayment policies are quite strict. You may need to start repayment as soon as the funds are disbursed.

The rules and regulations laid on private student loans and their repayment vary with a different lender. So before choosing on private student loans, get a clear understanding of it. And also compare among the available private lenders to choose the best among them.

Application for private student loans

Private student loans are to be taken after applying for federal student loans. Borrowers be it, the students or parents with good credit scores can sometimes get loans with lower interest rates than federal loans. In average cases, it is said that only direct subsidized loans are cheaper when compared to private loans. Yet, you may want to apply for federal loans as they provide income-driven repayment plans, forbearance, deferment, and forgiveness programs. Most private student loans adopt a full underwriting process. Private lenders require a good credit score or high income to approve loans, else you will need to produce a cosigner. The good private lenders out there are CommonBond, College Ave, SoFi, Citizens Bank, Discover, Navient, Wells Fargo, PNC Bank, Sallie Mae, and many more. Banks, credit unions, and a new crop of online lenders. It's important to look for fees, borrower protections, and interest rates before taking loans.


Federal vs Private Student loans

There are many differences and distinguishing factors between federal and private student loans. Compare them by looking into the table below.

Factors

Federal Student Loans

Private Student Loans

When payments are declared due?

Payments aren’t due until after you graduate, leave school, or change your enrollment status to less than half-time.

Many private student loans require payments while you are still in school, but some do allow you to defer (put off) payments while in school.

Interest rates

The interest rates are fixed and are usually lower than private student loans.

Private student loans can have variable or fixed interest rates, which may be higher or lower than the rates on federal loans depending on your circumstances. And the variable rates keep fluctuating based on the market.

Subsidies

If you have financial need, you may qualify for a loan for which the government pays the interest while you’re in school on at least a half-time basis and during certain other periods. This type of loan is called a “subsidized loan”.

Private student loans are often not subsidized. In the case of an unsubsidized loan, you will be responsible for all the interest on your loan.

Credit check

No need to get a credit check to qualify for federal student loans (except for PLUS loans). 

Private student loans often require an established credit record or a cosigner.

They may allow a hard or soft credit check. And cosigner is also expected to have good credit scores.

Cosigner

Federal Student Loans does not require any cosigner.

You may be asked to apply with a creditworthy cosigner if you don’t have good credit or don’t have a credit history at all.

Tax benefits

Interest may be tax-deductible.

Interest may be tax-deductible.

Consolidation and refinancing

Federal Student Loans can be consolidated into a Direct Consolidation Loan.

Private student loans cannot be consolidated into a Direct Consolidation Loan but may be refinanced by another private lender.

Postponement options

If you are having trouble repaying your loan, you may be able to temporarily postpone or lower your payments.

You should check with your lender to find out about options for postponing or lowering your loan payments.

Repayment plans

There are several repayment plans, including income-driven repayment plan.

You should check with your lender to find out about your repayment options. Only a few lenders offer the option of the income-driven repayment plan.

Prepayment penalties

There is no such prepayment penalty fee.

You need to make sure there are no prepayment penalty fees. There are few private lenders who may demand a prepayment penalty fee.

Loan forgiveness

You may be eligible to have some portion of your loans forgiven if you work in public service.

Although many private lenders do not offer loan forgiveness programs, some student loans from state agencies can be forgiven in certain circumstances.

Where to get help

Contact your loan servicer first. If you have difficulty with your loan servicer, send feedback to the federal government.

Contact your loan servicer first. If you have difficulty with your loan servicer, contact the Consumer Financial Protection Bureau for assistance.

When compared, federal student loans have an upper hand over the private student loans in offering benefits for the students. 


Pros And Cons of Federal Student loan

Student loans are used by college students to help pay for their educational expenses. Before any other option, a Federal Student loan is the primary go. Even as the top choice, the Federal student loan has its own advantages and disadvantages. Take a look at the pros and cons of the Federal  Student Loan listed below. 

Pros of federal student loans

You can consider Federal Loans as of the best source of financial help because of the benefits that you get from it. Few advantages of federal student loans are listed below,

  1. Applying for a federal student loan is very simple. You just need to fill a FAFSA. Most of the federal student loans do not require a credit check or a co-signer.

  2. The interest rates are fixed and are lesser when compared to private student loans. The interest rates are not influenced by any market fluctuations. It should be noted that the rates offered are lower than the rates associated with your credit card payments.

  3. The repayment of your federal student loans does not begin until you finish college. You will be given a grace period as well which your servicer must honor.

  4. Your interest may be paid by the government if you can demonstrate a financial need and get your federal student loan subsidized.

  5.  One can avail of a number of flexible repayment plans when the borrower goes about repaying the loans. You can also postpone any payments to be made once you face any difficulty while repaying.

  6. If you take up certain jobs or at organizations that are designated as non-profit then you can qualify to get a portion of your loans forgiven. Given that you meet all the required conditions.

Cons of federal student loans

Federal student loans are affordable and come with a number of benefits for the borrower but they may not be the go-to solution for every student. Here are some of the potential drawbacks associated with federal student loans -

  1. Graduate students do not have access to subsidized federal direct loans. The subsidized federal direct loans are made available only to undergraduate students.

  2. Loans given to graduate students have a higher interest rate as compared to the loans given to undergraduate students. 

  3. A borrower will not be able to discharge his/her loans if they have declared bankruptcy. 

  4. Those borrowers who are unable to make payments can find relief by a provision under a category called “undue hardship”. But it is quite difficult to qualify for this category so the benefit offered is limited. 

  5.  Limits on the borrowing capacity for unsubsidized loans. Although one can qualify for these loans regardless of their credit, grades or financial need, each year you can borrow an amount which ranges from $5,500 for dependent undergraduate students and $20,500 for graduate or professional students. Apart from these borrowing limits for each year, there are also total loan limits. 


Pros and Cons of Private Student Loans

Before you go ahead with private student loans you need to consider both sides to understand it is right for you. Here are the pros and cons of private student loans - 

Pros of private student loans

  1. Unlike federal loans that are limited in size, private student loans can cover the total cost of attendance(COA).

  2. In certain cases, the borrower can receive a lower interest rate with a private lender instead of going ahead with the federal direct program

  3. A borrower can get additional discounts with private lenders. One example would be the auto pay reduction of 0.25% on the interest rate

  4. The application process and disbursement of funds with private student loans is shorter

  5. Parents with a good credit score but don’t want to be the primary borrower of the student can seek refuge with the private student loans available to them

  6. Private lenders have attractive cosigner release options.

Cons of private student loans

  1. A credit check is done before the loan is offered

  2. Cosigners are expected to have a credit score rating of 720 or higher

  3. The interest rate offered is usually variable so the rate can increase or decrease over the life of the loan instead of being constant

  4. There are cases where the borrower might have to start repaying back the loan while still in school

  5. The repayment plans that are offered are not as flexible as the ones offered by the federal direct program.


Concluding thoughts

When it comes to borrowing student loans, the first choice is to go for the federal student loan, because, a federal student loan can provide you the maximum benefits and good interest rates. It should be noted that private student loans are generally more expensive than federal student loans. You should move towards private student loans only if you have exhausted all of your federal student loans. You may find a good private loan but not better than a federal student loan. 

Be well aware of what you are getting into, especially when it deals with loans. A loan might seem attractive but be well aware of all the terms and conditions and not just the repayment terms. Loans can help you get the future you deserve or they can haunt you forever. So, understand the related terms in-depth and compare among all the available options to avoid risks in the future.  

Which is better federal or private student loans?

To make better choices you must understand their difference, pros, and cons mentioned in the article. If you are eligible for federal student loans, you can choose federal loans as they have a lesser rate of interest and you will be granted loans without a cosigner or good credit score. Also, you are eligible for the standard loan protection programs offered by the federal government and the relief programs releases during pandemic or other during other emergencies. But if you are not eligible for federal loans, you can always apply for private student loans.  

How to manage educational expenses without taking loans?

You can apply for grants and scholarships to cover your educational expenses. Grants are provided on need-based whereas, scholarships are provided based on merit. So it would be helpful if you can get good scores which makes you eligible to apply for scholarships. You can work part-time at your school to bear few expenses. You can also apply to be a resident advisor to get free housing and save money on living costs. You can save by reducing your living expenses and also can consider online schooling which can reduce the tuition cost.