Federal vs. Private Student Loans — What You Need to Know

Private or federal student loans: what’s the difference between the two, and which should you choose?

This is a question that many students and their parents may face when figuring out how to pay for college. But it can also be a consideration for borrowers who are repaying student loans or interested in refinancing them.

Here’s an overview of the key differences between federal and private student loans.

Eligibility and Borrowing Limits

Private Lenders

Each private lender has its own requirements for approving a student loan. Generally, you’ll need to have a steady income, good credit history, and low debt-to-income ratio — or a co-signer who does.

Other requirements might include U.S. citizenship or residency, and proof of college attendance.

Federal Loans

Federal student loans follow federal student aid eligibility requirements.

Generally, you must be a U.S. citizen or permanent resident borrowing for a student enrolled in a degree-granting program at least half-time. Students also have to maintain satisfactory progress toward their degree to maintain eligibility.

Typically, most students can more easily access federal student loans. But undergraduate students face borrowing limits as low as $5,500 per year. PLUS Loans and private student loans typically set borrowing limits to the cost of attendance, after other student aid is applied.

For students who may be ineligible for federal student aid or facing loan limits, private student loans can be an alternative way to get funds for college.

Student Loan Credit Requirements

Private Lenders

Credit history and score is a key factor that private lenders use to determine if you’re likely to repay a debt. The more favorable your credit, the more likely you are to get approved and offered lower interest rates and fees.

Many students can’t meet private student loans’ credit requirements on their own, however, which is why 88% of private student loans have a cosigner.

Federal Loans

Federal student loans are more accessible to borrowers without established credit or with poor or fair credit. Direct Subsidized and Unsubsidized Loans are extended to undergraduate and graduate students with no credit requirements at all.

The Direct PLUS Loan, which is open to graduate students and parents of undergraduates, does include a credit check and requires “non-adverse credit” — a lower bar to clear than most private lender’s credit requirements.

If you have adverse credit, you still have the option to appeal a PLUS Loan application or add an endorser (similar to a cosigner).

Student Loan Rates and Fees

The interest rates and fees of student loans are the main factors that determine your borrowing costs.

Private Lenders

As mentioned, private student loans are tied to credit, and rate offers differ according to each borrower’s credit. A better credit score and positive borrowing history can be enough to get you lower private student loan rates. Most private lenders don’t charge an origination fee for student loans.

Federal Loans

Federal student loan rates, however, aren’t based on credit. In fact, every borrower gets the same rate and fee for the type of federal student loan they borrowed. The student loan rates are adjusted each school year, as dictated by law. Here are federal student loan rates for 2020-21:

  • Direct Subsidized and Unsubsidized Loans for undergraduate students: 2.75%
  • Direct Unsubsidized Loans for graduate students: 4.30%
  • Direct PLUS Loans: 5.30%

A one-time fee is also part of the costs of a federal student loan. The fee is 1.059% for Subsidized and Unsubsidized Direct Loans and 4.236% for PLUS Loans, and is withheld before loan funds are paid out.

So which is more affordable: a private or federal student loan? In most cases, a federal student loan can offer an easier and more affordable way to borrow. But private student loans can be a lower-cost alternative to PLUS Loans for well-qualified borrowers.

Subsidized Interest and Forgiveness

Some borrowers can get help with their federal student loans if they qualify for subsidies or forgiveness. (Private student loans aren’t eligible for federal subsidies or forgiveness.)

Direct Subsidized Loans are need-based aid for undergraduates. Those who have a high financial need, meaning their college costs are high relative to their ability to pay them, can qualify for these subsidized loans.

With subsidized loans, any interest assessed while these student loans are in deferment is paid by the federal government, rather than being added to the loan balance.

Student loan forgiveness is another potential federal student loan benefit. Federal programs such as Public Service Loan Forgiveness, the Teacher Loan Forgiveness Program, and National Health Corps loan repayment assistance can provide partial or full forgiveness for borrowers who complete work service requirements.

Federal student loans are also discharged if the borrower dies or becomes totally disabled. Many private lenders will discharge loans under the same circumstances but check with your lender to be sure.

Repayment Terms and Protections

Finally, there’s the difference in repaying private and federal student loans.

Private Lenders

Your chance to adjust private student loan repayment terms happens when you’re shopping and applying for the loan. Once you sign a loan agreement, you’re locked into the terms of the loan. This includes the loan length and monthly payment amounts.

You might have the option to forbear or defer payments, but these policies are set at your lender’s discretion.

Federal Loans

Federal student loans, on the other hand, come with numerous borrower repayment options and protections.

Borrowers are guaranteed mandatory deferment or forbearance for specific situations, such as returning to school or experiencing a job loss or other financial hardship.

You can also apply to change your repayment plan at any point, which will adjust your monthly payments.

Federal repayment plans include several that tie monthly payments to your income to ensure that they’re affordable. These income-driven repayment plans even offer forgiveness of remaining balances after 20-25 years of payment.

The COVID crisis further contrasts federal and private student loans’ borrower protections and relief. The CARES Act suspended payments and interest charges on all federally-owned student loans (extended by executive order through December 31, 2020).

By comparison, private student loans are offering more limited disaster forbearance and interest still accrues during these forbearance periods.

The Bottom Line on Private Vs. Federal Student Loans

Generally speaking, federal student loans are more accessible to borrowers and don’t rely on credit to set costs. They provide better protections and benefits for student loan borrowers, including options for borrowers who experience financial hardship.

Some borrowers might even receive direct assistance with student loan costs through interest subsidies or student loan forgiveness.

But in some cases, choosing a private student loan can make sense. College for students who have already maxed out federal student loans can use them to access more funding.

Graduate students and parents of undergrads might consider private student loans as a lower-cost alternative to PLUS Loans. And refinancing student debt with private student loans can be a way to adjust loan terms, including lowering your interest rate.

Review your options, borrowing needs, and borrowing qualifications to see which student loans are available to you. This can help you choose the best federal or private student loan to cover college costs and keep borrowing costs lower, both now and through the life of your loan.

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