Federal vs private school loans
Here's a brief guide to federal and private student loans—what they are, what sets them apart, and how to apply.
Federal student loans
There are two types of federal loans for undergraduate students—direct subsidized (needs-based) and direct unsubsidized (not needs-based). To be eligible for federal student loans you have to fill out the Free Application for Federal Student Aid (FAFSA®) each year you’re in school. You’ll find out how much you’re approved for in the financial aid offer you get from each school. The third type of federal loan is available for parents and graduate students: PLUS Loans.
Benefits and drawbacks
- Flexibility: Undergraduate federal student loans can offer more flexibility in repayment (like income-driven repayment plans, where the monthly amount is based on your salary after college) than private ones.
- No credit check: The government won’t check your credit. So, whether it’s good, bad, or non-existent, you can still be eligible for federal loans. You won’t need a cosigner. (PLUS loans, however, require a credit check.)
- Standard interest rate: Federal loans’ interest rates are set each year. However, they only offer fixed interest rates (rather than variable). Depending on economic conditions, one type might be better than another.
- Specialized forgiveness plans: If you’re planning to teach, work in government, or work in other public service sectors, you may be able to have the government forgive your federal student loans—but there are very strict regulations that need to be followed.
Private student loans
Private student loans can help you pay for college after you've explored scholarships, grants, and federal student loans. These loans are made possible by banks, credit unions, and other financial institutions. There can be differences between private loans, so you need to do some research. You apply for a private loan directly from the company that issues it.
Benefits and drawbacks
- Credit based: This means the lender will evaluate your credit history, among other factors. Since many students haven’t built up their credit, a creditworthy cosigner is often required.
- Options: You can generally decide how you want to make payments—in-school or after you leave—and whether you want a fixed or variable interest rate.
- Programs to lower your total cost: Some private loans offer benefits that can lower your total cost—like a discount when you sign up for auto-debit.
- Repayment: Unlike federal loans, you generally can’t change the repayment plan that you choose when you first get the loan.
5 Tips to find the best student loan for you
- Consider federal loans first (since they have more flexibility); fill out the FAFSA® each year. There may be a limit to how much you can borrow in federal loans; if you need more, consider a private loan.
- Factors to consider: Private lenders may offer different interest rates, fees, benefits, and ways to save money on your loan. Check out their websites and keep a spreadsheet for each loan you’re thinking about.
- Learn the “language”: When you’re looking for loans you’ll see new words like interest rate, cost of attendance, principal, and more. Like any new topic, understanding these terms will make it easier to make a decision.
- Consider future you: If your future job won’t pay much after college, consider how much your monthly loan payments will be—will you be able to handle them? A student loan calculator can give you a starting point.
- Get advice from experts and peers: Got an older sibling or relative who’s in college? Check with them about their experience with lenders. Ask your school’s financial aid office and your high school counselors. If you’re new at financial matters, see if family members can help you find your way through all the technical terms.
Find the right student loans for you
If you need to borrow money for college, remember there’s more than just one kind of loan. Many people use both federal and private student loans, but again, you should always start with the federal loans that you’re allowed from your FAFSA®. Then, if you still need more funds to pay for all of your school-related expenses, research private student loans and get one that’s best for your situation.
With a little preparation, you can get yourself ready to examine different loans and choose the one that will work best for you now—and in the future.