The Must-Know Differences between Federal and Private Student Loans

Federal Student Loans

If you’re looking at this article it means that you are now thinking about how you’re going to afford your tuition. This article will give you the rundown on Federal Student Loans and on Private Student Loans. Before we get into it, let’s quickly review which opportunities you should apply for and in which order.

First, take money that you don’t have to pay back. This means taking advantage of all the Grants and Scholarships that are available to you. This is money that will not accumulate interest since you won’t have to pay any of it back. Only after exhausting your ability to get this “free money” should you start looking into student loans.

When you do start considering student loans, make sure you apply for federal student loans first. You only want to look into private student loans after going through all of your other options. Here is why.

Studying student loans

Private Student Loans are the Final Resource for Paying your Tuition.

Private Loans fill the funding gap when savings, scholarships, and federal student aid aren’t enough. The typical scenario involving a private student loan goes something like this:

Sally Mae Scenario

After exhausting other funding options, Oscar needs a private loan to help pay for his bachelor’s degree. His dad wants to help out. Oscar applies for a Smart Option Student Loan. Since approval and rates for a private loan are based on a variety of underwriting factors, including credit history and income, Oscar’s dad cosigns the loan to help his son improve the likelihood of approval.

The loan offers the choice of making monthly interest payments, $25 payments each month, or deferring payments until after school.

Depending on creditworthiness and other factors, the Annual Percentage Rate (APR) on Oscar’s loan could be from 4.25% to 11.35%3. There will be with no origination fee if he elects a variable interest rate. However, it could go up or down after the loan is approved. Lowest rates shown include the auto debit discount.

After Oscar graduates and makes 12 on-time principal and interest payments and meets certain credit requirements, he can apply to release his dad as a cosigner.

The repayment term on Oscar’s loan will be between 5 and 15 years, depending on the loan amount.

For an undergraduate, private loans may be the last bridge between them and their bachelor’s degree. But for graduate students and graduated professionals, private student loans may be the last ray of hope of achieving their dreams. This is because some private student loans can help you afford professional obligations such as studying for the bar after law school or completing residency after medical school.

Private student loan providers can typically let you borrow 100% of your cost of attendance. This is the biggest advantage of choosing to borrow from a private student loan provider.

Why are Private Student Loans the Last Alternative?

Private student loans lack a lot of the benefits that federal student loans offer. This includes income-driven repayment plans, deferment and forbearance options, and forgiveness programs. You really only realize after you graduate college, that these benefits make all the difference.

On top of the missed opportunities that come from Federal Student Loans, shopping for private student loans can be a huge hassle. The name of the game is comparing the student loan terms to find out which one is best for you. You’ll find yourself haggling over

  • Repayment Options – choosing how and when you will be repaying the loan.
  • Payment Schedules ranging between 5 to 20 years.
  • Fixed and Variable Interest Rates, which are usually higher than federal loan terms.

Why are Federal Student Loans a Better Option?

While private loans may be able to cover 100% of your education needs, you do not want to go to them first. This is because they don’t offer the benefits that are offered to federal student loan borrowers.

These protections include.

Some private lenders offer some of these benefits, too, but they’re typically not as favorable as the federal versions.

The other added benefits of federal student loans are that:

  • The interest rate on federal student loans is fixed and usually lower than that on private loans—and much lower than that on a credit card!
  • You don’t have to begin repaying your federal student loans until after you leave college or drop below half-time.
  • If you demonstrate financial need, the government pays the interest on some loan types while you are in school and during some periods after school.

Too Poor for College, Too Rich for Financial Aid?

Tuition rates are at all-time-highs. According to the College Board, the average cost of tuition and fees for the 2017–2018 school year was $34,740 at private colleges, $9,970 for state residents at public colleges, and $25,620 for out-of-state residents attending public universities. This is a 129% increase for private tuition rates and a 213% increase for public tuition rates in the last 30 years – already accounting for inflation! The cost of tuition is becoming so high that a lot of middle-class families are finding themselves too poor for college and too rich for financial aid.

Why will you not get enough financial aid to cover your degree? Financial aid is based on a complex formula that takes into income, assets, and other financial information to calculate your “Expected Family Contribution”. This amount is basically how much the government thinks that families can afford to pay for their kid’s college education.

The problem with this formula is that it doesn’t consider your family expenses, your savings needed for retirement, or the costs of saving for your other child’s college education. This disconnect between what the government thinks you can contribute and what you can actually contribute ends up leading to lower financial aid.

On top of that, you are competing for a limited pool of funding. At the end of the day, there’s still a cap on how much you can borrow from the government for your university education because more and more people are applying to college every year.

If you are an undergraduate student, the maximum amount you can borrow each year in Direct Subsidized Loans and Direct Unsubsidized Loans ranges from $5,500 to $12,500 per year. If you are a graduate or professional student, you can borrow up to $20,500 each year in Direct Unsubsidized Loans.

What are the Biggest Differences Between Federal Student Loans and Private Student Loans

  1. Federal student loans are funded by the government. Private student loans are funded by a lender, usually a bank, state agency, school, or credit union.
  2. Federal student loan payments aren’t due until after you graduate or leave school. Most private student loans require payments while you are still in school.
  3. The interest rates on Federal Student Loans are fixed and usually lower than the fixed or variable interest rates by your private student loan provider.
  4. With Federal student loans, you may be eligible for subsidized loans. In these loans, the government pays for the interest on your loans while you are still in school. This isn’t a thing for private student loans.
  5. With federal student loans, you may be eligible for flexible repayment plans, loan deferment, and even loan forgiveness. Private lenders do not offer this.

To get more detail on the differences between Federal Student Loans and Private Student Loans, go to the Federal Student Aid website.


If you’re looking at how you’re going to be covering tuition, consider Scholarships and Grants first. Then, before taking on any private student loans, make sure you apply for the federal student loans.

If you’re already looking into taking care of your student loan debt quick and easy, we recommend checking out our latest guide on how to pay of your student loans.

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