Federal vs. Private Student Loans: Which Is Better to Secure for College?

By Jon O'Donnell Updated on March 28, 2022

When it comes to financing your college education, you’ll likely be offered federal and private loans as part of your financial aid package. So, what’s the difference? Federal student loans are funded by the federal government, while private loans are provided by another lender — such as a bank, credit union, state agency or school. Typically, federal loans will give you more benefits and flexibility — so consider these first. 

Throughout this article, we’ll provide you with a detailed view of federal vs. private student loans and when you should ideally borrow each of them.

What is the difference between federal and private student loans?

There are several differences between federal and private student loans. For starters, as you probably guessed from the names, federal student loans are provided by the federal government while private student loans come from private lenders. The application process and who qualifies for these loans is also different.

To apply for federal loans, you need to fill out the Free Application for Federal Student Aid (FAFSA). If you qualify for federal student loans (or any other forms of financial aid) you'll automatically be approved. Typically, federal student loans are based on a combination of factors, including your school's cost of attendance, your financial need, and your family’s expected contribution. With private student loans, you need to apply separately to each lender and whether or not you're approved depends in large part on your credit score — and they often require a co-signer for students. Federal student loans have the same interest rate for everyone who takes out a loan in a given academic year. With private loans, the lender sets the interest rate and it's different for each student, depending on their financial details. 

Both federal and private loans need to be paid back after you graduate. But the student loan repayment plans are very different. Federal loans offer a variety of repayment options, including income-driven repayment plans and even loan forgiveness programs. Generally speaking, private lenders don't offer these options. 

Top 11 advantages of taking out federal student loans before private

If you need to take out loans to pay for college, federal student loans have a lot of advantages over private student loans — they should always be what you apply for first. 

There are a several different types of student loans available to you. Depending on your school's cost of attendance and how much you and/or your family are able to pay, you may be able to cover all your college funding needs through a combination of federal student loans and other financial aid.  

Below, we'll discuss the top 11 advantages of federal loans and why you should max those out before looking into private loans — it could save you a lot of money in the long run. 

1. Applying for the four types of federal student loans is easy

There are four types of federal loans. Applying for any of these federal student loans is typically straightforward and simple.

By submitting a FAFSA, students are also applying for federal loans. There is no separate application, no credit check, and no co-signer is required. However, Parent PLUS loans do require a credit check before approval. Your credit score won’t effect your eligibility for Parent PLUS loans, but you may not be approved if you have a poor or short credit history.

2. You won't have to repay them until after you graduate

If you go the federal route, you can focus on school without worrying about a payment plan. You won’t have to start repaying your federal student loans until you graduate, leave school, or change your enrollment status to less than half-time.

Additionally, you get to take advantage of the six-month grace period after graduation before your repayment period begins. While some private lenders have flexible repayment terms, they can differ depending on the lender you choose.

3. They have a fixed interest rate

The interest rate on federal loans is fixed and typically lower than both private loan and credit card interest rates. Private loans generally have variable interest rates, which means they can spike — sometimes higher than 18%. Higher interest rates mean your monthly loan payments will likely rise post-graduation.

Federal student loans have a set interest rate for each academic year. For 2022-2023, the federal loan interest rate is 3.73%. Generally, it can be hard to secure a private student loan with a lower interest rate — especially because most college students do not have an excellent credit history.

4. You may qualify for a subsidized loan

If you need a lot of help to pay for school, you’ll likely qualify for a federal subsidized loan. And if you need to defer payment on a subsidized loan, the government will pay the interest during deferment.

Undergraduate students and graduate students who submit a FAFSA form and demonstrate financial need may be offered a Direct Subsidized Loan. That means your loan will not accrue interest throughout your enrollment in school. This can help lower your monthly payments post-grad and help lower your overall student loan debt.

5. Most don't require a credit check

Especially if you’re applying for loans right out of high school, you might not have much of a credit history. You can only take out private loans if you have a credit history, and you may not qualify for many unless you have a high credit score. Federal loans are available to any enrolled undergraduate student with financial need. And, federal loans can actually help you build a good credit history if you pay them back consistently and on time.

However, Parent PLUS loans will require a credit check for the parent borrowing the loan. While your rates will not be affected by your credit score, you may not be approved if you have an adverse credit history.

6. You won't need a co-signer

Private loans usually require a parent or guardian co-signer who will be responsible for the loan balance if you’re unable to pay. Because federal loans aren’t credit-based, they don’t have this requirement.

7. You'll have the opportunity to consolidate

It’s easy to consolidate your federal loans into one, easy-to-remember payment. The federal government offers the opportunity for you to take out a Direct Consolidation Loan to lump all of your smaller federal loans into a single payment. Consolidation uses a weighted average of your interest rates and — again — it’s not credit-dependent.

8. Repayment issues? You can postpone or lower payments

If you’re facing financial hardship and can’t afford your payments, federal loan programs offer two temporary options for postponement. Deferment lets you postpone or lower payments for a total of three years. Forbearance lets you stop payments for up to a year at a time.

Additionally, you may qualify for a few different student loan payment options based on your income. You can sign up for income based repayment plans to lower your minimum monthly payment or explore other repayment options like refinancing. Learn more about these options here.

 9. There is no prepayment penalty

Some private loans make you pay a penalty if you pay off the loan before the term. Why? The lender won’t earn all the interest income you’d otherwise pay. Federal loans don't come with these penalties.

10. You may qualify for loan forgiveness

Private lenders do not offer opportunities for loan forgiveness. If you have federal loans, you may be able to have some or all of your loan debt canceled. Loan forgiveness is possible if you work for a nonprofit, certain government sectors, or specific low-income school districts. The Public Service Loan Forgiveness program forgives federal loans after 10 years and Perkins Loans can be forgiven even sooner.

11. If you pass away or become disabled, your loans will be canceled 

If you die or become permanently disabled, the government won’t require repayment of your federal loans. This is usually not the case with private loans. 

When to borrow private student loans

The first step in your quest to finance your college education is to fill out the FAFSA. It's a not a quick process, but it's your best chance for securing financial aid, including grants, work-study, and federal loans. While you're waiting to hear back, look into other financial aid resources you can access, such as scholarships or grants. These are available from many state/local governments and private organizations. 

The more aid you can cobble together from grants and scholarships, the less student loan debt you'll need to take on — and the less debt you have now, the less you pay later. However, most students need more cash for college than they can get from scholarships and grants.

If that's the case for you, the next step is federal loans. While they have many benefits, there are borrowing limits on federal student loans. The loan limits per year vary depending on criteria such as what year you are in school, you/your family's income, and whether you're a dependent or independent student.  If the max you can borrow through federal loans isn't enough to cover your educational costs, you do have other student loan options. 

Most financial institutions (banks, credit unions, and private lenders) can help you fill the so-called tuition gap. To qualify for a private student loan, the lender will evaluate your overall creditworthiness and offer you a loan amount and payment terms based on that. If you don't have a long credit history (common for younger college students) you may need to get a co-signer to secure a private loan. 

Check out more college planning resources with Nitro

Figuring out how to get the funding you need for college can be very stressful for students (and their families). And as college costs only go up, it feels like it's getting harder every year. But there are resources that can help you secure college financial aid. Your best bet is to first apply for financial aid that doesn't need to be paid back (grants, scholarships, etc.) and federal student loans. If you still need more help paying for college, then start applying for private student loans. You'll want to look for private lenders who offer you loan terms with the lowest interest rates and the most flexible repayment terms. 

Lining up college financing is just one of the many tasks you have to tackle as you prepare for college. Nitro is here to help you at every step along the way — from managing college applications, securing funding, and managing your student loan repayment once you finish school. 

Make sure you explore all the resources Nitro offers, including our $2,000 Nitro College Scholarship — with no essay required!

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Published in: Federal Student Loans

About the Author
Jon O'Donnell

Jon is a writer and marketer for Nitro who is passionate about bringing transparency to the student loan process along with providing families with the information needed to make smart financial decisions. He also just recently refinanced his student loans allowing him to pay them off 5 years faster all while saving an additional $152/month. As he continues to pay them off himself, he strives to help others do the same. Jon also has a long history of connecting people with educational opportunities to help them improve their careers and their overall personal finances. In his free time you can find him reading travel blogs and researching destinations around the world in search of his next adventure. Read more by Jon O'Donnell