Federal vs. private student loans: which is right for you?

College • September 26, 2018 • Reyna Gobel

What you’ll learn

How federal and private loans compare
The basics on interest rates, breaks in payment, and loan limits
How to improve your credit score

Relying solely on federal student loans isn’t always the best choice for everyone. The best option may be a combination of federal and private student loans.

Here’s what you need to know when researching them:

Interest rate options have changed

An old reason for avoiding private student loans was the lack of fixed interest rates—rates that remain the same for the life of the loan. Without fixed interest rates, your monthly payment could vary every month. This made budgeting for student loan payments a lot harder. Now, many private student loans offer fixed interest rates, sometimes lower than their federal student loan counterparts for highly-qualified applicants.

However, don’t forgo some of the benefits that come with federal loans, like subsidized interest rates and income-based repayment plans.

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Breaks from payment differ

There are certain circumstances, like a hardship or going back to school, where you request to have your payments temporarily suspended.

Private student loans are issued by private companies and many have different programs for payment breaks depending on the company that issued the loan. Ask your lender about time given and rules for loan repayment.

Federal student loans offer deferment and forbearance, which allow guaranteed breaks from payment for set circumstances. You can also get payments as low as $0 on federal student loans with income-driven repayment plan options. Check with your lender or federal loan servicer to see if your interest will continue to accrue during your break in payments.

Approval amounts can be different

Federal student loans can cover up to the full cost of attendance, including room and board, tuition and fees, etc. However, this amount is not based on income and payments may be well above what a family can afford.

Some private lenders may approve a loan amount based not on the cost of attendance, but the ability to repay. Because the amount may be lower, the family may decide to pick a less expensive school or the student may need to find a part-time job. Either way, it’s more likely that they’ll be able to afford the loan.

Credit checks vary

Most federal student loans don’t require credit checks, but private student loans do. Federal loans such as Parent PLUS and federal graduate loans require a credit check that considers only whether the applicant is experiencing certain specific credit conditions. The advantage to a more thorough credit check is that it takes into account payments the family is already making on everything from credit cards to other student loans to mortgages. The best part? Credit approval can change. In three months, you can improve your credit health with simple actions such as paying bills on time and paying down credit cards.

Affordability is a priority

Choosing between student loans is more complicated than it used to be. But yay! You have more options. Choose between federal or private student loans or a combination of the two based on the differences that are important to you, which may include interest rates, your credit history, payment breaks, and loan limits. Always make repayment affordability your top priority in all loan borrowing.

Reyna Gobel is a journalist, author, professional speaker, and educator who's been quoted by Money Magazine, Real Simple, and The Washington Post. She’s spoken at hundreds of colleges across the country about student debt—and she’s the author of "CliffsNotes Graduation Debt" and “CliffsNotes Parents’ Guide to Paying for College and Repaying Student Loans.”