Federal vs Private Student Loans: Which is Best
As a college student, you have a few options for funding your education. And loans are a pretty common way to help pay for school. Loans come in two flavors: federal or private. We recommend that everyone start by filling out the FAFSA® (Free Application for Student Aid). This form is required if you plan to take out federal student loans, such as Direct Subsidized and Unsubsidized loans, as well as Direct PLUS loans. Federal student loans are loans offered under the federal student aid programs, and your lender is the U.S. Department of Education.
Direct loans come with a fixed interest rate for all applicants, regardless of credit, and come with generous periods of deferment and forbearance, as well as a variety of repayment plans.
You also have the option of exploring private student loans to help pay for college. Private student loans are issued by private lenders such as banks and credit unions and come with competitive fixed or variable interest rates and a variety of benefits and repayment plans depending on the lender.
If you or your cosigner have excellent credit and a stable employment history, you may qualify for a lower interest rate on a private student loan than what is offered in the federal program.
Compare Federal Student Loans and Private Student Loans
|Federal Student Loans||Private Student Loans|
|Lender||U.S. Department of Education||Bank, credit union, financial institution, state agency, or college/university|
|Loan Limits||Subject to annual and lifetime loan limits, and may not exceed your cost of attendance minus other financial aid received.||Full cost of attendance minus other financial aid received. Most lenders also have aggregate (lifetime) limits|
|Interest Rate Options||Only Fixed||Variable and fixed rate available|
|Cosigner Required?||No||Yes (unless borrower has a strong credit history and proof of income)|
Loan fees through Sept. 30, 2022
|Typically 0% to 5% depending on lender and borrower criteria|
|Repayment Plans||Many options available, including plans based on income||Vary by lender|
|Suspending Repayment||3 years of deferment and 3 years of forbearance available, if eligibility requirements are met|
|Canceling Repayment||Multiple forgiveness and discharge options available||Very limited options|
Private Student Loans
Private student loans are available to students and parents who need additional funds to cover costs not met by other financial aid. These loans are offered by private lenders such as banks, credit unions, etc. To qualify for a private student loan, borrowers will have to meet the credit requirements for a given lender.
What Is a Private Student Loan?
A private student loan is a loan offered by a private lender such as a bank, credit union, or other financial institution to pay for a student's cost of attendance as determined by their school, minus other financial aid received. Private student loans are known for their competitive interest rates and low-to-no loan fees for qualified borrowers. Many people supplement their federal student loans with a private student loan after they have exhausted all other forms of financial aid.
Eligibility criteria for a private student loan varies by lender, but lenders typically evaluate borrowers based on the following:
- Credit history (usually no lower than 660 FICO Score®
- Age (Normally 18+)
- Citizenship (U.S. citizen or permanent resident)
- School and/or degree type (varies by lender)
- Enrollment status (typically at least half-time enrollment is required)
- A creditworthy cosigner (when applicable)
Borrowing Limits for Private Student Loans
For private student loans, you generally may borrow up to your school’s cost of attendance minus other financial aid. Your aggregate loan limit will depend on the lender you work with and the degree you're pursuing when you apply. It is normal for private student loan lenders to permit graduate and professional students to have higher aggregate loan limits than undergraduate students.
How to Apply for a Private Student Loan
Before applying for a private student loan, we recommend that you complete the FAFSA. Not only should you exhaust your federal student aid options first, including loans, but this will also help you gauge how much you would need to borrow from a lender. When you are ready to apply for a loan, follow these three steps:
- Compare lenders
- Review competitive rates and benefits before deciding
- Apply for your loan
After you apply, the lender will evaluate your application and decide if you’re approved or denied. If you are denied, you may want to consider applying with a creditworthy cosigner. Even if you are approved, depending on your credit history and profile, you may be able to qualify for a better rate with a cosigner.
Best Private Student Loans
We partner with some of the best private student loan lenders out there to help you fund your education. They offer competitive interest rates, flexible repayment terms, and more.
Compare Featured Lenders
What is a Federal Student Loan?
Federal student loans are offered by the federal government under the federal student aid program. There are several different types of federal student loans. Types of federal student loans include:
- Direct Stafford Loan
- Direct Stafford Subsidized Loan
- Direct Stafford Unsubsidized Loan
- Direct PLUS Loan
- Offered to parents of dependent undergraduate students and graduate or professional students
Subsidized vs. Unsubsidized Loans
There are two types of loans students can borrow from the government: subsidized and unsubsidized. Other names for these types of loans include Direct Stafford Loans and Stafford Loans.
The Difference Between Subsidized and Unsubsidized Student Loans
Though both are offered by the government, there are some key differences between subsidized and unsubsidized loans.
Subsidized Student Loan
The U.S. Department of Education (ED) pays the interest on a subsidized student loan while you’re in school, during your grace period, and during periods of authorized deferment. Subsidized loans are only available to undergraduate students who demonstrate financial need, and these loans come with annual and cumulative limits on how much you may borrow.
For Direct Subsidized Loans, the fixed interest rate for the 2021-2022 academic year is 3.73% for loans first disbursed between July 1, 2021 and June 30, 2022.
Unsubsidized Student Loan
Unsubsidized loans are the most common type of student loan, and they are available to both undergraduate and graduate students. You do not have to demonstrate financial need to qualify for one, and there are annual and cumulative limits on how much you can borrow. Unlike subsidized loans, the government does not pay any interest on this loan. Interest accrues as soon as these loans are disbursed, and it is the borrower's responsibility to repay all of it.
For Direct Unsubsidized Loans, the undergraduate fixed interest rate for the 2021-2022 academic year is 3.73% for loans first disbursed between July 1, 2021 and June 30, 2022.
The graduate fixed interest rate for the 2021-2022 academic year is 5.28% for loans first disbursed between July 1, 2021 and June 30, 2022.
Parent PLUS Loan
Parent PLUS Loans are Direct PLUS Loans that are offered to parents. We explore what a Parent PLUS Loan is, who’s eligible to receive one, and more in this section.
What is a Parent PLUS Loan?
A Parent PLUS Loan is a fixed-rate college loan that is funded by the US. Department of Education and available to the parents of dependent undergraduate students. Parent PLUS Loans currently have an interest rate of 6.28% for loans disbursed between July 1, 2021 and June 30, 2022.
Who is Eligible for a Parent PLUS Loan?
To be eligible for a Parent PLUS Loan, you must not have adverse credit history. You must also be the legal parent of a dependent undergraduate student. And you must meet the basic eligibility requirements for federal financial aid.
Borrowing Limits for a Parent PLUS Loan
For a Parent PLUS Loan, the borrowing limit is your child's cost of attendance for their school minus other financial aid.
Parent PLUS Loan Application
Before you can apply for a Parent PLUS Loan, your child must have first filed the FAFSA. You can complete the Parent PLUS Loan application on StudentAid.gov, but before you do, here is what you should expect:
- You will have to unfreeze your credit (if applicable) before beginning the application
- The application should take about 20 minutes
- The application must be completed in one session, so if you don’t finish, you’ll have to do it all over again
- You will need your child’s personal information and school name
- You will need your own FSA ID, personal information, and your employer’s information
- Once you finish your application, you will be required to complete a Direct PLUS Loan Promissory Note, which states the terms and conditions of the loan
Parent PLUS Loan Interest Rate
The interest rate for a Parent PLUS Loan is 6.28% for the 2021-2022 academic year.
Graduate PLUS Loan
Graduate PLUS Loans are Direct PLUS Loans that are offered to graduate and professional students, and they can help a student cover costs unaddressed by unsubsidized loans. We cover eligibility requirements, information on borrowing limits, the application, and more in this section.
What is a Grad PLUS Loan?
A Grad PLUS Loan is a federally-funded, fixed-rate college loan available to graduate and professional students.
Who is Eligible for a Grad PLUS Loan?
To be eligible for a Grad PLUS Loan, you must be a graduate or professional student, not have adverse credit history, and meet the basic eligibility requirements for federal financial aid.
Borrowing Limits for a Grad PLUS Loan
For a Grad PLUS Loan, the borrowing limit is your cost of attendance for school minus other financial aid.
Grad PLUS Loan Application
The Grad PLUS Loan application on StudentAid.gov, but before you, here is what you should do:
- Unfreeze your credit (if applicable)
- Give yourself at least 20 minutes to complete the application and complete it in one session
- Gather your verified FSA ID, school name, personal information, as well as information for your employer
- Complete the Direct PLUS Loan Master Promissory Note (terms and conditions available once you finish your application)
Grad PLUS Loan Interest Rate
The interest rate for a Grad PLUS Loan is 6.28% for the 2021-2022 academic year.