Jon O'Donnell Updated on August 7, 2017

The choice between federal and private student loans isn’t as easy at used to be. While federal student loans may be a better option in case a student has an economic emergency in the future, private student loans may offer lower interest rates than some federal student loans.

Here are the basics you need to know:

What are federal loans?

Federal student loans are loans that are financially insured by the federal government. In the case of new federal student loans or those issued over the last few years, they are also issued directly from the federal government. You can apply for federal student loans by filling out the Free Application for Federal Student Aid (FAFSA) form for each year you’re enrolled in college.  The most common types of federal student loans are subsidized, unsubsidized, and PLUS loans.

To learn more, read about the different types of federal student loans.

What are private loans?

Private student loans are loans that aren’t issued or guaranteed by the federal government. You can get private student loans from banks or other lenders. In order to obtain a private loan, you have to pass a check on your credit report. Additionally, your income may affect how much you can borrow.

Benefits of federal loans

The main benefits to federal student loans are repayment plans based on income, the ability to take breaks from payments in certain circumstances, and easy credit standards for approval. Most federal loans issued directly to students don’t require credit checks. However, PLUS loans, which are issued mainly to parents and grad students, have a minimal credit check that’s much easier to pass than what is required with a private student loan.

Benefits of private loans

If you have a good credit rating, you may be able to get a cheaper interest rate on PLUS loans. Current PLUS loan rates for parents and grad students are over 6%. On the flip side, it’s possible to get a private student loan for a rate of 4% interest or less.

Another often-overlooked benefit to private student loans is the lack of an origination fee -- a fee charged the second you take out a loan that’s a percentage of the loan value. Thus, if you are only borrowing the loan for a short period of time, you can pay back the loan quickly and are only charged interest for that specific time period.

Key differences between federal and private loans

The main differences between federal student loans are income-driven repayment options for federal loans and guaranteed payment breaks. Private student loan lenders may also offer a variety of repayment plan options and breaks from making payment. However, those breaks are at the discretion of each lender and aren’t always guaranteed. Federal student loans are also easier to acquire and don’t involve thorough credit checks.

The type of loans you and your family choose is a personal decision based on your finances and credit rating. Be sure to review all of your options carefully. 

For further reading, check out this article about comparing loans, and take a look at our comprehensive guide to filling out the FAFSA.

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