Compare Federal vs. Private Student Loan Options With These Helpful Charts

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Updated on Tuesday, April 2, 2019


Maybe you’ve heard that it’s generally best to rely on federal student loans when borrowing for college. But you might also be aware that there are a few times when it makes sense to prioritize private loans instead.Maybe you’re not 100% sure which one is right for your circumstances. To determine the answer, let’s compare federal and private student loans in the context of how they play out at each stage of the borrowing process.

Shopping for the loan

If you compare student loans by zeroing in on their nuts and bolts, you might be able to eliminate one or the other right off the bat. If you’re dead set on borrowing at a variable interest rate, for example, a private loan would be your only option.

LenderDepartment of Education, via the contracted loan servicer assigned to your debtBank, credit union, private company, school or state agency
Annual borrowing limitUndergraduates: Up to $5,500 to $12,500, depending on your dependency status, year in school and loan type

Graduate students: Up to $20,500, or up to the total school-certified cost of attendance with PLUS loans

Parents: Up to the total school-certified cost of attendance
Up to 100% of your total school-certified cost of attendance
Interest rate typeFixedFixed, variable and hybrid
Interest rates*Direct loans for undergraduates: 5.05%

Direct loans for graduate students: 6.60%

Direct PLUS loans: 7.60%
SubsidiesDirect subsidized loans, which are awarded based on financial need and don’t accrue interest while you’re enrolled, during your grace period, or when you are in defermentSome lenders provide cash rewards for good grades and graduating, but no major lender forgives interest while you’re enrolled — and financial need is not a consideration
Origination feeDirect loans: 1.062%

Direct PLUS loans: 4.248%

*Information and rates collected on March 27, 2019

Applying for the loan

Now it’s time to compare eligibility requirements for private and federal student loans. Federal loans might be a better fit for full-time students, for example, whereas the best private lenders cater to international, part-time and especially creditworthy students.

Eligible borrowersUndergraduate, graduate and professional students who are enrolled at least half time at an eligible school (or their parents) and are citizens or eligible noncitizensStudents who are enrolled at least part time at an eligible school (or their parents and relatives) and are either citizens or international students with a permanent resident cosigner
Application requirementsComplete the Free Application for Federal Student Aid (FAFSA), and accept your college’s financial aid package containing the loansProvide financial documents, such as tax returns and pay stubs to your lender during a formal application process, online or off
Credit checkDirect subsidized and unsubsidized loans: None

Direct PLUS loans: Requires no “adverse credit history”
Yes — rates are based on your creditworthiness
CosignerDirect subsidized and Unsubsidized Loans: Not required

Direct PLUS loans: With adverse credit, you might have to include an “endorser” on your application who will agree to be responsible for the debt
Applicants with a poor or little credit history can improve their chances of approval by including a cosigner, and some private lenders require cosigners for undergraduate loans

Receiving the loan

After you accept (or decline) the federal loans offered via your college financial aid award letter, your school directs the process. On the private loan front, however, you need to introduce your lender to your school before it’s too late — otherwise, you might not receive the loan in time to pay for your semester.

Final requirementsSign a promissory note and complete loan entrance counselingSign a promissory note
Disbursement of the loanYour school typically pays out the loan in two portions, covering your tuition and fees at the beginning and middle of the school year and then returning unused funds to you for other expensesIt can take weeks for your lender and your school to get on the same page, so it’s wise to apply for private loans as early as possible — the disbursed funds typically land in your school’s bank account, not yours
Cancellation optionsCancel within 120 days of disbursement, free of charge and interestNo cancellation option, but you could return unused funds directly to your lender in the form of a lump-sum, in-school payment

Repaying the loan

As you compare private and federal student loans, note that the twists and turns of your repayment could vary significantly.

Grace periodNo payments due for six months after you graduate, leave school or drop below half-time enrollment — parents can request the same six-month deferment Varies by lender, but most top-rated lenders offer a federal-loan-like deferment of six months (in addition to in-school repayment options, such as interest-only payments)
Repayment termsStandard repayment plan spans 10 years, but you can switch to a term as long as 30 yearsVaries by lender, with terms ranging between 5 and 25 years
Repayment flexibilityThe Department of Education allows you to switch from your standard plan to one of seven repayment plans, including income-driven optionsIt’s rare for a private lender to allow you to alter your repayment plan, but it’s often possible to pause repayment (see deferment, forbearance below)
Income-driven repayment (IDR)Choose from four IDR plans, which limit payments to a percentage of your discretionary incomeExtremely rare, although the Rhode Island Student Loan Authority is one lender offering a single IDR option
Deferment and forbearanceClear-cut paths to temporarily pause or reduce payments for up to three years at a timeVaries by lender — some offer more limited forms of deferment and forbearance, most commonly in cases of economic hardship
Loan forgivenessYou could receive loan forgiveness if you work in government or for an eligible nonprofit through programs like Public Service Loan Forgiveness and Teacher Loan ForgivenessAlthough private lenders don’t offer loan forgiveness, you could seek forgiveness or repayment assistance from your employer or state
Prepayment feeNoneVaries — top-rated lenders don’t charge this fee
Late payment feeYesYes — penalty varies by lender
Consolidation and refinancingFederal loans may be grouped into a direct consolidation loan, but the government doesn’t currently offer refinancing or the ability to reduce your interest ratesPrivate and federal loans may be consolidated and refinanced with a private lender to reduce rates or monthly payments
Source of supportYour loan servicer — then the Federal Student Aid Ombudsman GroupYour lender — then the Consumer Financial Protection Bureau

Compare student loans to choose the best option for your situation

You might find it easier to apply for a federal loan but more costly to repay it. Conversely, you could save on interest by borrowing a private loan but, as a result, miss out on repayment protections exclusive to the Department of Education.

It’s unlikely you’re going to look at one option or the other as the perfect solution, but by comparing each student loan type at each stage of the borrowing process, you can find the better choice.

If you still have trouble deciding, ask yourself which loan type gives you the best chance for a successful repayment. After all, being able to repay your debt without wrecking your finances is usually the most important consideration.

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