Federal Student Loans vs. Private Student Loans

Put simply, federal student loans are funded by the federal government, whereas private student loans are provided by a private lender such as a bank, credit union, state agency, or school. Most students opt for federal student loans if they are eligible, as these generally come with the most benefits.

You should try to apply for federal student loan above all else, as they come with numerous benefits when compared to their private counterparts. Government loans are often subsidized, meaning that you’ll simply pay less overall. There are also federal PLUS loans available, which help graduate or professional students to pay for college, and also help the parents of dependent undergraduate students to pay for college too. Students from poor backgrounds with exceptional financial needs can also qualify for a Federal Perkins Loan. A Federal Perkins Loan is paid back to your chosen school, and has a fixed interest rate of 5%.

Private student loans often come with high interest rates, some even as high as 18%. Many of these loans also feature interest rates that are variable. This means that your lender could decide to raise your interest rate in the future, meaning that you will pay even more overall. Federal student loans, however, have fixed interest rates, meaning that you’ll pay the same interest rate until your debt is completely paid off. Private student loan interest is also not tax deductible, while federal student loan interest is indeed tax deductible.

Federal student loans don’t require any monthly payments until you leave school, whereas private loans will often begin to require payments while you are still in education, putting financial strains on some students. Federal loans can also qualify you for income-driven repayment plans. Income-driven repayment plans mean that you pay off your student debts according to your future salary. If your salary is low enough, you may not even have to pay any monthly costs at all.

Private student loans may require a credit check in order to be eligible, and if you’re unfortunate enough to have bad credit, you may also require a cosigner. A cosigner is a trusted friend or family member who agrees to pay your debts if you cannot afford them yourself. Most federal student loans, on the other hand, do not require a credit check if you are eligible.

Federal student loans can be consolidated into a direct consolidation loan, making it easier to manage your debt and monthly payments in the future. This is not the case with private student loans, which cannot be consolidated. Federal loans also have no pre-payment penalty, meaning that you cannot be charged a fee for paying off your debt early. Some private student loans will indeed come with a pre-payment penalty, though this will differ from lender to lender.

As you can probably see from most the points we have described above, federal student loans are generally a much better option when looking at financing your higher education. However, your circumstances (and other things such as criminal convictions) may leave you ineligible for a government-backed loan. In this case, be sure to shop around for a private student loan, as many of them will exploit you in the future. Alternatively, you can always look into a private scholarship.