federal vs private student loans

Key Differences Between Federal and Private Student Loans

If you have to borrow money to help pay for college, you need to understand the differences between private student loans and federal student loans.

Taking the time to understand what types of loans are available, and what your responsibilities are for paying back those loans, can help you make the most informed decisions about financing your college education.

Key Differences Between Federal and Private Student Loans

There are several different types of federal student loans: Direct Subsidized and Direct Unsubsidized Loans; Direct PLUS Loans; and Federal Perkins Loans.

Your financial aid package will outline which loan(s) you’re eligible for. You might also qualify for private student loans, but keep in mind that these are generally more expensive than federal student loans and may not have fixed interest rates or attractive repayment plans.

Some of the key differences between federal and private student loans are listed below.


Repayment requirements – federal student loans don’t need to be paid until six months after you graduate, leave school, or change your enrollment status. Private student loans typically have to be repaid while you are still in school.

Interest rates – interest rates are fixed on federal student loans are usually much lower than private student loan rates. Also, some federal loans feature subsidized loans, where the government pays the interest on the loan while you’re in school. Private student loans are not subsidized so you are responsible for paying all the interest on the loan.

Credit checks – you won’t need a credit check for a federal loan, but private student loans will require you to have a good credit score and clean credit report.

Cosigner federal student loans typically don’t require a cosigner; most private student loans do have this requirement.

Tax advantages – interest on federal student loans may be tax-deductible; interest on private loans typically are not tax-deductible.

Consolidation options – federal student loans can be consolidated into a Direct Consolidation Loan; you don’t have this option with private loans.

Repayment options – if you end up having struggling to make your loan payments on a federal loan, you may be able to reduce your monthly payment or postpone loan payments temporarily. Most private lenders don’t offer as many types of loan deferment or forbearance option, so these loans are less flexible in terms of repayment terms.

Prepayment penalty fees – federal loans don’t impose a penalty fee for paying off the loan before the loan term. Private loans can impose prepayment penalty fees, so be sure to review the terms carefully.

Loan forgiveness – if you work in public service – say, you are a police officer, social worker or a nurse – you may be eligible to have a portion of your federal loans forgiven. Lenders typically don’t offer any type of loan forgiveness program for private loans.

Loan assistance – you can get free help for federal loans by calling 1-800-4-FED-AID and review information on the U.S. Department of Education website. Recently, the federal government announced plans to oversee private lenders. As part of that effort, there will be an advocate for borrowers with private loans. To reach this advocate, you will need to contact the Consumer Financial Protection Bureau’s private student loan ombudsman.

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