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College  |  January 13, 2023  |  Reyna Gobel

A Guide to Federal vs Private Student Loans

What you'll learn

• The differences between federal and private student loans 
• The basics of interest rates, options for delaying payments, and loan limits
• The role of credit in student loans

Paying for college doesn’t offer a one-size-fits-all solution. If you need to borrow money, the best—and sometimes the only—option may be a combination of federal and private student loans.

Here are some of the differences between these two types of student loans and what you need to know when researching them.

They can offer different interest rate options

There are two different types of interest rates—fixed and variable. A fixed interest rate remains the same for the life of the loan, while with a variable interest rate, your monthly payment could vary every month as the loan’s index changes. 

Federal loan rates for undergraduate Direct Subsidized Loans and Direct Unsubsidized loans obtained on or after July 1, 2022, and before July 1, 2023, are fixed interest only—4.99%.

Most private student loans offer both types of interest rates. If you have excellent credit and are highly qualified, the rate could be lower than a federal student loan. 

Options if you need to delay your payments

There are certain circumstances, like a financial hardship, an internship, or going back to school, when you can request to have your student loan payments deferred (temporarily suspended). The plans offered can differ between federal and private student loans.

• Federal student loans, issued by the government, offer deferment and forbearance, which allow guaranteed breaks from payment for a specific set of circumstances. There are also different payment plans that can help you if your finances are tight. 
• Private student loans, issued by private companies like banks and credit unions, can have different programs for temporarily stopping payments if you’re going back to school or have an internship. If you’re having financial problems, alternative repayment plans may or may not be available; ask your lender what options they offer.

It’s important to note that federal loans offer benefits that most private student loans don’t—like subsidized interest rates and income-based repayment plans. These can offer extra flexibility, especially when it comes to paying back your loans, so you should consider them before private loans. 

Note: Always check with your private lender or federal loan servicer to see if interest will continue to accrue (grow) during your break in payments.

You can be approved for different amounts

Federal student loan amounts are determined by the cost of attendance at a school—including room and board, tuition and fees, etc.—minus your Expected Family Contribution and any other financial aid you’re receiving. This amount may still not cover the total that a student will need for a year at school.

Most private lenders will approve a loan amount based on a school’s cost of attendance and based on your ability to repay (because they check the borrower’s (and cosigner’s, if there is one) credit. That means that if a federal loan doesn’t cover all your school-certified expenses, you can make up the difference with a private student loan.

Credit checks for student loans

Undergraduate federal student loans don’t require credit checks; federal loans such as Parent PLUS and federal graduate loans do require a credit check. 

Private student loan lenders require credit checks. That means they will review your credit history, among other criteria, to determine your ability and willingness to repay before making the loan. Students often haven’t had time to build up their credit history; that’s why a cosigner is necessary for many students to qualify for a private student loan.

If credit quality is an issue in qualifying for a loan, a borrower can ask another cosigner to apply with them, or work on improving their credit health with actions such as paying bills on time and paying down credit cards.

Being able to repay your loans is a priority

Choosing a federal or private student loan—or a combination of the two—is the way that many families pay for college. Always consider a federal undergraduate loan first (since they offer more options) but if you need additional funds, a private student loan can be the answer. Understand the differences between the two, which may include interest rates, your credit history, payment flexibility, and loan limits. And always keep in mind that you’ll need to repay these loans after you leave school, so affordability should be a top priority.