Private vs. Federal Student Loans: What’s the Difference?


Knowing the difference can help you decide how best to finance your education.  / Credit: Getty Images

Knowing the difference can help you decide how best to finance your education. / Credit: Getty Images

President Biden’s student loan forgiveness program was announced in August and applications will likely be available in October, bringing potential relief to millions of federal student loan borrowers.

If you have student loans, you may be wondering if you qualify. The first thing to know is that the exemption only applies to federal student loan borrowers. Private student debt will not be part of the forgiveness program.

Private student loan holders should instead consider refinancing to free up cash. They can easily get started right now.

But what is the difference between private and federal student loans? Here’s what you need to know.

How are federal and private loans different?

Federal student loans generally have more favorable terms. They offer alternatives to pardons, annulments and discharges beyond the plan announced by the Biden administration. Private loans can fill a gap when public loans, scholarships, bursaries, grants, and subsidies aren’t enough to pay for school, but without the same public repayment options like deferment or forgiveness.

If you are looking for a loan to help finance your education, you have several options to pursue. You can easily get started today.

Here are some other important differences: federal student loans

If you applied for your loan directly through the Free Application for Student Aid (FAFSA) form and were approved, you likely have a government student loan. Federal student loans come in specific forms from the US Department of Education:

Direct Unsubsidized Loans (no requirement to demonstrate financial need) Direct Subsidized Loans (must demonstrate financial need) Direct PLUS Loans for Graduate and Professional Students Direct PLUS Loans for Parents of Students Participating in Loans Other Things to Know About Federal student loans They have fixed interest rates. The amount you can borrow is limited. Repayment options include income-based plans, waivers, deferments, and other options if you fall behind or default. They limit the size of both unsubsidized and subsidized loans. You can return or cancel part of the loan within certain time frames. Loans can be consolidated under a federal program. Wages can be garnished if you default. Payments vary by loan type: An unsubsidized public loan principal is typically deferred for six months after the student borrower graduates. But interest starts to accrue when your school receives the loan proceeds. You can choose to pay the interest immediately or have interest payments added to the principal amount of the loan, called capitalization. With capitalized interest, you pay more in the long term. Put another way: You pay interest on the interest because it becomes part of the principal. However, under a subsidized public loan, the government makes the interest payments until the deferment ends and regular payments begin. Private student loans

Private or non-government administered student loans are offered by a variety of financial institutions such as banks, credit unions and other financial companies. They are also the only type of the two that offer traditional refinancing options, which can be a good alternative if forgiveness is not available for your loans. You can explore your private student loan refinancing options now to see if you can save money.

Other things to know about private student loans They can work well for borrowers with established credit. Prices, requirements and fees are different and set by each institution. They are not eligible for public loan forgiveness programs and most government programs. The repayment terms can be strict. Some require payments while you’re still in school (while others have a feature that allows you to wait until you graduate). Some have variable interest rates (meaning the interest rate can change). They generally require a parent or guardian to co-sign the loan (or the potential borrower must have an established credit record). They are mostly unsubsidized – you are responsible for the interest. They can be refinanced – but not consolidated under federal programs. You can possibly be able to borrow more than under public loan programs, depending on creditworthiness. Some require “prepayment” penalties or fees for paying off the loan early. You can go into default as early as three missed payments. How are private and federal student loans similar?

In either case, you are borrowing money to pay for school and should consider your ability to make payments once you graduate, including your expected income. Both public and private loans:

Help pay for post-secondary education including college. Generally requires monthly payments. Have interest payments that may be deductible. Can be complicated to navigate, so research each type thoroughly. Both types of student loans can go into default if you miss a certain number of payments. Which type of student loan is best?

The type of loan you need depends on your personal situation.

Financial regulators and experts recommend researching and exhausting all options for public student aid, scholarships, bursaries and loans before looking into private loans.

Some states also offer cheap student loans. Whatever suits your needs, experts warn that you should never pay with credit cards, which have much higher interest rates than student loans, public or private. Research your options thoroughly. An online financial advisor can also help steer you in the right direction.

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