Federal vs. Private Student Loans

A group of students with blue backpacks walking toward a college building

If you’re about to become one of the 44.5 million college students borrowing money in the United States, make sure you understand your loan options. Two basic types of student loans exist: federal and private. In this article, we’ll look at the pros and cons of Federal vs. private student loans.

Here’s what you need to know about your student loan options for now, when you take them out, and for the future, when you must start repaying them.

What Are Federal Student Loans?

The government offers federal student loans. They’re unique because your credit history or score does not matter for qualification. As of 2019, interest rates are fixed at 4.45% for undergraduates and 6.0% for graduates.

You do not have to start repaying these loans until you graduate. You can also put your debt on hold with deferments and forbearances. Depending on your situation, your federal loan may be subsidized to avoid accruing interest while you’re still in school or using a deferment period.

Federal student loans also offer income-driven repayment plans and potential student loan forgiveness under specific circumstances.

It’s virtually impossible to find a private student loan that offers such a laundry list of benefits. But federal student loans do have one significant drawback. You can’t refinance one unless you switch it to a private lender and waive your benefits like income-driven repayment.

What Are Private Student Loans?

Private student loans are offered by the same institutions that offer personal loans, auto loans, and home mortgages: banks and credit unions. Most students only turn to private loans to cover any gap not paid for by federal student loans.

Private student loans are more challenging to acquire because they demand higher credit scores. Still, you may qualify for a higher borrowing limit and lower interest rate than those offered by federal student loans.

You can expect a few unwanted drawbacks of private student loans as well:

  • Variable interest rates that have the potential to increase over time
  • Very little flexibility for alternative or income-based repayment plans
  • You may need to make payments while you’re still in school

Deciding Which is Best For You

Thanks to the flexibility and easy approval of federal loans, maximizing your use of them makes sense. Utilize subsidized federal loans as much as possible to shield yourself from interest charges until you graduate.

Selecting federal loans gives you the comfort of knowing you can defer, use a forbearance, or arrange an income-based repayment plan if money ever gets tight. If you find yourself in a better financial position in the future and a lower interest rate becomes a higher priority, you can always refinance into a private loan.

In most cases, private student loans only make fiscal sense out the gate if you have a near-perfect credit score and a steady income to make monthly loan payments without any concerns.

Either way, you’re about to commit to a boatload of debt for many years ahead. It’s a necessary evil to achieve your educational goals. Make sure you monitor your debt wisely and ask for help if you ever need it.

Don’t wait to get out of debt! Read this: A Complete, Step-By-Step Guide to Get Out of Debt.