Federal vs. Private Student Loans

By Keith Speights – Updated Dec 7, 2023 at 11:50 AM

Federal vs. private student loans: An overview

Anyone looking to borrow to pay for college has a choice of federal vs. private student loans. But how do these student loans differ? Which one is the best option for which situation? Read on to get the answers to these questions and more.

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Two people standing with a graduate in cap and gown and holding their diploma. — Image source: Getty Images.

Data source: Office of Federal Student Aid, ConsumerFinance.gov, Sallie Mae. Information current as of Aug. 15, 2023.
Criteria	Federal Student Loans	Private Student Loans
Interest rates	5.5% to 8.05%	4.55% to 16.45%
Loan terms	Usually 10 to 25 years	Usually 10 to 25 years
Loan amounts	$5,500 to $12,500 per year for undergraduate students, up to $20,500 for graduate students	Varies by lender but can include the full cost of attending college
Where to apply	Through your college after completing the Free Application for Federal Student Aid (FAFSA) form	Lender website
Main benefits	Fixed interest rates, no credit check required, can be consolidated, no prepayment penalties, potential eligibility for loan forgiveness	Potential for lower interest rates, can borrow more, usually no up-front fees
Main drawbacks	Up-front fees required, limits on the amount you can borrow	Interest rates could be higher in many cases, credit check often required, can't consolidate loans, prepayment penalties sometimes apply, loan forgiveness usually not available
Better suited for	Individuals without a strong credit history and for whom federal student loan maximum borrowing isn't an issue	Individuals with excellent credit or those who need to borrow more than federal student loans permit

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Undergraduate students can borrow between $5,500 and $12,500 per year through Direct Subsidized Loans and Direct Unsubsidized Loans. Graduate or professional students can borrow as much as $20,500 per year with Direct Unsubsidized Loans.

The amount that can be borrowed depends on your progression in school and your dependency status. Direct Plus Loans can be used to fund any college costs not covered by other sources of financial aid.

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There are several key potential advantages for federal student loans:

Interest rates are fixed (meaning they can't go up) and are usually lower than you can obtain with private student loans.
No credit check is required, which can be a big plus for younger students who haven't built a credit history or anyone with a poor credit record.
You don't have to start repaying federal student loans until after you've left college (or are attending college less than half-time).
With subsidized loans, the federal government pays your accrued interest while you're in school and sometimes after you complete your education.
If you run into problems making payments, federal student loans offer flexible plans and options to delay payments.
It's possible that you could qualify for an income-driven repayment plan that bases the amount you have to repay each month on how much money you make.
Some individuals could be eligible for student loan forgiveness.

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Interest Rate

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However, there are also some possible disadvantages that stand out for federal student loans:

Most federal student loans require up-front payment of loan fees. The fees are currently 1.057% of the total amount borrowed for Direct Subsidized Loans and Direct Unsubsidized Loans and 4.228% for Direct PLUS Loans.
Federal student loans limit how much you can borrow. It's possible that the total cost of your college education could exceed these amounts.

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The primary advantages of obtaining a private student loan:

It's possible to obtain lower interest rates with a private student loan than a federal student loan if you have an excellent credit history.
You can borrow the entire cost of your college education with many private student loans. Federal student loans have lower maximum amounts.
Private student loans typically don't require the payment of up-front fees, which can be helpful for cash-strapped students.

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Some disadvantages of private student loans:

Although interest rates can sometimes be lower than those for federal student loans, they could also be higher in many cases. Private student loans with variable interest rates could especially be more costly during periods when the Federal Reserve raises interest rates to fight higher inflation.
Private lenders often require credit checks. Students with poor credit histories could have problems securing approval for private student loans.
Unlike federal student loans, multiple private student loans can't be consolidated into a single loan. However, private student loans can be refinanced to obtain lower interest rates.
Some private student loans impose penalties if you pay off the loan early.
Unlike federal student loans, loan forgiveness usually isn't available for private student loans.

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Financial aid written on a Post-It note lying on a desk next to a pile of hundred dollar bills and drawings of a cap and a bag of money. — Image source: Getty Images.

Federal vs. private student loans: Which should I choose?

Most students should first try to obtain federal student loans. It doesn't take long to complete the FAFSA form. The effort could especially pay off if you qualify for federal subsidies or more flexible repayment options. However, if you can't fully cover the cost of college with federal student loans and/or other sources of financial aid, private student loans can be a good option.

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About the Author

Keith Speights is a contributing Motley Fool healthcare analyst covering publicly traded companies across pharmaceuticals, biotechnology, medical devices, technology, and marijuana. Prior to The Motley Fool, Keith was CEO of Constant Care Technology, a healthcare technology company; vice president of American HealthTech, a healthcare software company; and a director of operations for Blue Cross Blue Shield of Mississippi, a health insurer. He holds a B.S. in Industrial Engineering from Mississippi State University.

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SLM is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in SoFi Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.