Federal vs. Private Student Loans: Compare Key Differences
Federal student loans offer payment relief and forgiveness options that are not available for private loans.
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Federal student loans, offered by the government, usually come with lower interest rates and valuable borrower protections — like income-driven repayment plans and student loan forgiveness programs.
Private student loans, which are offered by banks and credit unions, typically lack the borrower protections that come with federal loans. For that reason, it’s generally wise to consider private loans only if you have remaining costs after you’ve exhausted all federal loan options.
Recent data underlines the popularity of federal loans among borrowers: Today, roughly 92% of outstanding student loans are federal. The remaining 8% are private.
» MORE: How to pay for college
Here’s a summary of the key differences between federal and private student loans.
Federal student loans | Private student loans | |
|---|---|---|
Lender | The U.S. government. | A private lender, like a credit union, state-based agency or online bank. |
Interest rates | Fixed rates; no credit check. | Rates can be fixed or variable; need good credit to qualify. |
Borrowing limits | For undergraduates, between $5,500 and $12,500 per year. | Varies by lender; generally up to cost of attendance. |
Repayment plans | Standard 10-year plan; income-driven repayment plans; graduated and extended plans. | Varies by lender; generally no income-driven option. |
Loan forgiveness | 12+ forgiveness options, including Public Service Loan Forgiveness. | No forgiveness options. |
Relief options | Deferment; forbearance; loan discharge if you become permanently disabled, are defrauded by your school, certain other scenarios. | Varies by lender. Typically, short-term deferment and forbearance are offered. |
Interest rates
Federal student loans always have fixed interest rates. All loans taken out during an academic year have the same interest rate, and you’ll pay this same rate over the life of your loan. Most federal student loans don’t take your credit score into account; all borrowers get the same rate.
Private student loans can come with either fixed or variable interest rates. Unlike fixed rates, variable rates can change over the life of your loan, depending on market conditions. This means your monthly payments could be unpredictable, changing from month to month.
The private student loan interest rates for which you qualify generally depend on your credit score. Parents and graduate students with credit scores at least in the high 600s — or undergrads who apply with a co-signer with good credit — may get a lower interest rate with a private student loan than a federal one.
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Borrowing limits
Federal student loans have relatively low borrowing limits.
Undergraduates can borrow between $5,500 to $12,500 per academic year, depending on their year in school and dependency status. Overall, a dependent undergraduate can borrow up to $31,000 over their college career, while an independent undergraduate can borrow up to $57,500.
(A dependent student generally has financial support from their parents; independent students are at least 24 years old and support themselves financially.)
Graduate students can borrow up to $138,500 total in direct federal loans, including undergraduate borrowing.
Private student loan borrowing limits vary by lender, but generally, you can borrow up to your school’s cost of attendance.
Repayment plans
Federal student loan borrowers have a handful of student loan repayment plans to choose from:
Standard repayment plan. When you leave school, you’re automatically put into the standard repayment plan, which splits your total debt into 120 equal monthly payments over 10 years.
Income-driven repayment (IDR) plans. IDR plans cap your monthly bill based on your income, extend your repayment term to 20 or 25 years, then forgive any remaining debt.
Extended or graduated repayment plans. These plans start with lower payments that gradually increase until your debt is paid off. You won’t get loan forgiveness, like you could with an IDR plan.
Repayment plans for private student loans vary by lender and usually don’t include income-driven repayment options. Make sure to carefully review the repayment terms of any private loan before borrowing.
Student loan forgiveness
There are more than a dozen federal student loan forgiveness programs, such as:
Public Service Loan Forgiveness. Work for a qualifying nonprofit or governmental organization for 10 years, and your remaining federal student loans may be forgiven. You should enroll in an income-driven repayment plan to benefit from this forgiveness.
Income-driven repayment forgiveness. After 20 or 25 years of payments on an income-driven repayment plan, any remaining student loan debt will be forgiven.
Teacher loan forgiveness. Teach full-time for five consecutive years at a qualifying low-income elementary or secondary school to be eligible.
Private student loan lenders don’t offer loan forgiveness.
Some states also offer student loan forgiveness programs for borrowers who work in medicine or certain other high-need fields. These programs may apply to both federal and private loans.
Deferment, forbearance and other relief options
Borrowers experiencing hardship can request a temporary pause of their federal student loan payments through a forbearance or deferment. General forbearance may be allowed for up to 12 months at a time and up to three years over the life of your loan. Interest usually accrues during a forbearance. If you qualify for a deferment, it can last for up to three years, and interest might not accrue.
Income-driven repayment plans are another form of federal student loan relief. Your bills could be as low as $0 on an IDR plan if you have a very small income or are unemployed.
Most private lenders offer deferments if you’re in the military or enrolled in school. Lenders that offer forbearances typically do so for at least 12 months over the life of your loan.
Other loan features to consider
Federal student loans offer additional protections that private loans don’t.
For example, federal borrowers can access the borrower defense to forgiveness program, which discharges a borrower’s federal loans if they’re defrauded or misled by their college. They may also be able to get their loans discharged if their school closes.
Federal borrowers can also get loans discharged if they have a permanent and total disability. Disability discharges vary by private lender.
» MORE: How to get a student loan
Final takeaway: Use federal student loans before turning to private lenders
Federal student loans offer more generous protections and flexible repayment options, but they also have a relatively low borrowing limit. For many families, the reality is that $31,000 — the overall cap for dependent undergraduates — won’t cover the full cost of college.
Only after you’ve exhausted all federal student loans should you consider turning to private student loans to fill in any remaining cost gaps. You must submit the Free Application for Federal Student Aid (FAFSA) in order to qualify for federal student loans, along with other aid, like the need-based Pell Grant and work-study.
» MORE: NerdWallet's FAFSA guide
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