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Federal and Private Student Loans: Understand the Difference

The prospect of college is crazy exciting! It’s full of opportunities – the chance to study subjects you actually enjoy, meet awesome new people, and attend fun college parties. It seems almost perfect…until you get that first college bill. Now it’s clear: the crazy excitement of college is crazy-expensive! So expensive that you may have to take out some student loans in order to foot the bill. And, unfortunately, that’s the new normal nowadays, considering that 71% of all students graduating from four-year colleges in 2012 had student loan debt. But there are so many different types of student loans! How are you supposed to know which ones are best for you? In a cage match of federal and private student loans, who would win?

When borrowing for college, all student loans may look like the same debt trap. Whether the loans are private or federal, you feel like it’ll still take you forever to pay them back. But comparing federal student loans to private student loans is like comparing apples to oranges – if apples and oranges also came with loads of debt! Understanding the difference between federal and private student loans is vital for you to determine which loans you should take out and what impact they will have on your financial well-being.

Federal and private student loans: The basics

Federal student loans are loans funded by the federal government, specifically the Department of Education. Private student loans are not funded by the federal government. Instead, lenders (e.g., banks, credit unions, or state agencies) fund private student loans.

The rule of thumb is to borrow as much as you can in federal student loans before you take out any private loans. Why? In the differences we outline below between federal and private student loan, you’ll see that federal student loans offer you more benefits in the long run than private student loans.

The differences between federal and private student loans

Repayment options

Some private student loans require you make payments while you’re still in school. This means you’ll likely be having more ramen noodle dinners than the average college student. Meanwhile, you don’t have to start repaying federal student loans until you graduate, leave school, or change your enrollment status to less than half-time.

Federal student loans offer several repayment plans, including an option to tie your monthly payment to your income. Typically, private student loans don’t offer these income-driven plans. They also generally don’t have as generous borrower protections as federal student loans. If you’re having trouble repaying your federal student loan, you may be able to temporarily postpone or lower your payments. However, this is not always an option if you’re struggling to repay a private student loan, as these loans may not offer forbearance or deferment options.

Feeling ambitious? Think you’d like to pay your loans off early? Federal student loans do not have a prepayment penalty fee. Some private student loans can have a prepayment penalty fee though, which means you can be charged for paying your loan off within a certain time period.

You should also know that federal loans can be consolidated into a Direct Consolidation Loan, which can give you access to additional loan repayment plans and forgiveness programs. Private student loans do not offer this same benefit.


There’s a type of federal student loan called a “subsidized loan” that is available to students with appropriate financial need. If you have a subsidized loan, the government pays the interest while you’re in school on at least a half-time basis. There is no equivalent for subsidized loans in the private student loan world. So, no one is going to pay that interest but you.

The interest rates for all federal student loans are fixed. They are often much lower than private student loans and even lower than some credit card interest rates. In comparison, private student loans can have fixed or variable rates. Variable rates mean your interest rate can change over time with any market changes. This can substantially increase the total amount you’ll have to repay.


You won’t need a credit check for most federal student loans (except for PLUS loans), and you typically don’t need a cosigner. In fact, having federal student loans can help you establish a good credit record. This would be a major win when you go to buy a house or car later down the road!

However, private student loans generally require a credit check and an established credit record. Your credit record can affect the cost and terms of the loan, so it’s often preferable to have a cosigner on private student loans.


No one wants to default on their student loans. But it happens. And if you default on federal student loans, you’ll have more protection than if you default on private student loans.

You aren’t in default with a federal student loan until 270 days of non-payment. Meanwhile, after 120 days of non-payment on a private student loan, your lender will consider you in default. Also, private lenders can add collection charges to the loan amount. These collection charges can increase your total balance by up to 40 percent.

Just have a late payment on a private student loan? The lender will automatically begin to seek payment from any cosigners. Since you don’t need a cosigner with federal student loans, you won’t need to worry about your lender bothering those close to you.

While they need a court judgment to follow through, private lenders can take as much as 25 percent of your income if you fall into default. The federal government can also garnish your wages, but they can only take up to 15 percent of your income.


Federal student loans have options for forgiveness and discharge. However, it is unlikely that your private student loan lender will offer any forgiveness or discharge programs.

How do I apply for federal and private student loans?

To apply for a federal student loan, you’ll need to complete the Free Application for Federal Student Aid (FAFSA).

To apply for a private student loan, you’ll need to complete the application process with the lender offering the loan. These applications require a full underwriting process. The biggest private student lenders are Citizens Bank, Discover, Navient, PNC Bank, Sallie Mae, and Wells Fargo.

Remember: while everyone’s situation is unique, federal student loans generally offer more benefits than private student loans. So, reach your maximum in federal student loans before applying for private student loans.

Disclaimer: The viewpoints and information expressed are that of the author(s) and do not necessarily reflect the opinions, viewpoints, and official policies of any financial institution and/or government agency. All situations are unique and additional information can be obtained by contacting your loan servicer or a student loan professional.