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Federal Versus Private Student Loans: Which is Best

The key difference is that federal loans are provided by the government and private loans are provided by banks, credit unions, and other financial institutions.

Federal versus private student loans is a conversation you’re probably having and why you’re about to read this article. I’m going to break down the key areas of federal v private loans but if you want a deeper dive read the Guide to Student Loans.

Whether you choose federal student loans or private student loans, the money borrowed must be paid back and with interest. It doesn’t matter if you graduate or not the loan will need to be repaid. There are clear differences between these two student loan types with federal loans being your first choice.

Federal Student Loans

A federal student is funded by the federal government to help pay for your college education.

There are three types of federal loans:

  • Subsidized Direct Loans
  • Unsubsidized Direct Loans
  • Direct PLUS Loans (1) Grad PLUS Loans for graduate and professional students and (2) Parent PLUS Loans issued to a student’s parents.

It’s best to consider federal student loans before taking out private student loans.

Now, private student loans can help you pay for college after you’ve explored all financial aid such as scholarships, grants, and federal loans.

Private Student Loans

A private student loan is a credit from a private lender such as a bank, credit union, or other financing company. Private student loans can fill the gaps when federal financial aid isn’t enough.

Differences between federal loans versus private loans

Federal Direct Subsidized & Unsubsidized Student Loans Private student loans
FAFSA application required X
Apply directly with lenders X
Credit history required X
Loan amount limits set by federal gov’t X
Borrow up to the cost of attendance (COA) less financial aid received X
Add a cosigner X
Based on financial need X
(Direct Subsidized Loans only)
Repayment plan flexibility X

Federal Versus Private Student Loans

If you must take out student loans, federal student loans are the best option for the vast majority of borrowers. It is best to max out your federal student loan options before you borrow any private student loans.

Federal Student Loan Benefit

A key benefit to federal loans is flexible repayment plans. Depending on your financial situation you can choose the best repayment option for you. And if your situation changes, then you have the opportunity to request a new repayment plan. Federal loans also come with features such as deferment and forbearance benefits.

With federal student loans, you don’t need a credit history to qualify. They all come with fixed rates, set by Congress, meaning there will be no change to your rate over the life of the loan. However, there are strict lifetime loan limits as stated on

Subsidized and Unsubsidized Aggregate Loan Limit

Dependent Students (except students whose parents are unable to obtain PLUS Loans)
Independent Undergraduate Students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)
Independent Graduate or Professional Students
Subsidized Loan Limit
Unsubsidized Loan Limit
Total Loan Limit

Private Student Loan Benefit

Private loans are options to cover the cost of attending college when savings, grants, scholarships, and federal loans aren’t enough. These loans, however, are offered by banks, credit unions, and other financing companies. They set the loan limits, approval requirements, interest rates, and repayment terms. With private loans, you’ll need to apply and may need a cosigner to increase your chances for approval.

Most lenders offer fixed or variable rate private loans and some offer in-school deferment of payments. As the private loan market continues to grow and become competitive, many lenders are offering additional benefits.

When comparing federal versus private loans, think of private student loans as a supplement, not the first option. There are rare cases when private loans will fit your needs better than federal. They are:

  • Have already borrowed as much as you can under the Direct and Perkins Loan programs
  • Can borrow at interest rates substantially lower than current federal loan rates
  • Are completely committed to finishing the degree program on time
  • Have a specific plan to repay your loans within a few years of graduation (rather than repaying over 10 or more years)

If you have ALL of the above characteristics, a private loan can be a good option for you.

Every student’s situation is different. Consult with your school’s financial aid office for additional information and shop for the best private student lenders to compare.


All federal student loan interest paid and most private student loan interest paid may have tax benefits. Understand that both federal and private student loans are only discharged in bankruptcy if you can prove extreme hardship.

How to apply for federal student loans and private student loans

If you think you might need to borrow both federal and private student loans, always submit your FAFSA first. Doing so starts the process to receive financial aid offered from the colleges you’ve been accepted or attending. After learning about the amount of financial aid you’ll receive, you can then determine how much private student loans to apply for to cover the rest.

Apply to federal student loans

To apply for federal student loans, the first thing you need to do is complete the Free Application for Federal Student Aid (FAFSA). You need to submit the FAFSA to receive federal student aid. The FAFSA submission period is from October to June every year. In addition to federal student loans, the FAFSA also determines your eligibility for other federal student aid like grants and work-study.

Apply to private student loans

Applying for private loans are on an as-needed basis, but you’ll want to apply with enough time for a lender to review and process the loan. Depending on the lender, they may disburse the loan to the school on a per-semester basis or for the entire academic year.

You can use a private loan marketplace like LendKey that connects you to credit unions and local banks and Splash Financial for additional financing from private lenders. Both offer quick pre-approval and seamless application process. Want to shop for more options? Filter the best private loan companies on our marketplace.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of and His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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