Federal vs. Private Student Loans: 4 Key Differences

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In College Planning & Financial Aid General Getting a Student LoanLendKey

It’s the words high school seniors around the country anxiously wait months to read:

Congratulations! We are pleased to offer you admission to…”

Whether received via U.S. Mail or email, these words of college acceptance can be life-changing for both you and your student. While your recent high school graduate eagerly prepares for their first year at their dream college, you’ve been in the background running the numbers. And the news isn’t good. Scholarships and grants won’t cover the cost of the first semester, let alone the first year. The money you’ve set aside in a college savings fund helps, but still isn’t enough. Before you inform your student that they must attend a lower-priced safety school, consider another funding source – student loans. Both federal and private student loans can help close the funding gap. But, before either of you signs that promissory note, make sure you’re clear on the differences.

What’s a federal student loan?

Federal student loans are available to students enrolled at least half-time in a certificate or degree program at a participating higher education institution. These loans are funded by the United States government and awarded to eligible students as part of a college’s financial aid package. There are two types of federal student loans:

  1. Direct Subsidized – A need-based student loan where the interest is paid for by the government
  2. Direct Unsubsidized – A non-need-based student loan where the interest begins to accrue upon disbursement and is not paid for by a third-party

How to Apply

Students and parents must complete a Free Application for Federal Student Aid (FAFSA) by the college’s annual deadline. Financial and household data submitted in the application is used to calculate an Expected Family Contribution (EFC). This figure is subtracted from the college’s Cost of Attendance (COA) to determine financial need. The same student may be eligible for both Direct Subsidized and Unsubsidized Loans. Students are solely responsible for the repayment of either type the loan.

What’s a private student loan?

Private student loans are available to creditworthy students enrolled in a degree program at an eligible college or university. Some lenders may have minimum enrollment requirements to qualify. Students can receive loan funds from financial institutions, such as banks, credit unions, or other financial entities.

How to Apply

Students must generally meet age, credit, and citizenship requirements before loan approval., Student applicants who do not have a credit history or a steady source of income will oftentimes need to apply with a qualified cosigner. Applying with a creditworthy cosigner can sometimes help with securing a lower interest, which will reduce the cost of borrowing.

Borrowing limits are generally based on the school’s COA.

Students and cosigners, as applicable, are responsible for repayment.

Four key differences between federal and private student loans:

  1. Congress assigns fixed interest rates to federal student loans. Private student loans are available with fixed or variable interest rates. A borrower’s creditworthiness and the underwriting policies of the lender may influence the actual rate.
  2. Federal student loans may offer additional repayment options unavailable with private student loans, e.g., loan forgiveness.
  3. Private student loans require credit checks.
  4. The college’s financial aid office subtracts the student’s EFC from the COA to figure the maximum amount of financial aid the student may receive for the academic award year.

Federal student loans may not be enough to cover all educational expenses for the year. In contrast, you can typically borrow up to the actual COA with a private student loan.

Bottom Line

As you weigh your funding options, remember that student loans aren’t an either-or proposition. It’s possible to use both federal and private student loans to pay for your student’s college education. Apply now or learn more when you visit LendKey’s Private Student Loan FAQ page.



Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.