Federal vs. Private Student Loans


In College Planning & Financial Aid Getting a Student LoanLendKey

At last, the college admissions process is over. You’ve filled out your FAFSA, chosen your school, and gathered your scholarships. If you’re like most students, scholarships, savings, and financial aid probably don’t cover the entire cost of your education. Aside from tuition, there’s room and board, living expenses, textbooks – the list goes on.
One option is to supplement your funds with student loans. It may seem scary at first, but we’re here to break down the two main types of student loans.

Federal vs. Private Student Loans

The two major categories of student loans are private student loans and federal student loans. Federal student loans are taken out through the government, while private student loans are obtained through private financial institutions, such as banks and credit unions. While each has its advantages and disadvantages, it’s important to carefully consider which one is best for you.

Federal Student Loans

Federal student loans are handled by the U.S. Department of Education. There are three types of Direct Loans available through the U.S. Department of Education (excluding direct consolidation):

  • Direct Subsidized Loan: Offered to students who show financial need, these loans do not charge you interest while you are in school at least half-time
    For loans disbursed on or after July 1, 2019, and before June 30, 2020, the interest rate is 5.05%.
  • Direct Unsubsidized Loan: These loans don’t require you to show financial need, and they are available in larger amounts than subsidized loans.
    For loans disbursed on or after July 1, 2019, and before June 30, 2020, the interest rate is 4.53% for undergraduate students and 6.08% of graduate students.
  • Direct PLUS Loan: These are federal loans offered to parents of the dependent undergraduate student so that they can help you pay for school. There is no financial need requirement, but the borrower has to have a good credit history. It is also available for graduate or professional students. For loans disbursed on or after July 1, 2019, and before June 30, 2020, the interest rate is 7.08%.

Pros of Federal Student Loans

  • No credit history necessary. One reason why many college students opt for federal loans is that they generally do not require credit history. This also means that a cosigner is not necessary when applying for a federal loan.
  • Low interest rates. Another reason federal student loans may appeal to some people is because of their low, fixed interest rates for undergraduate students. This means that throughout the life of the loan, the interest rate stays the same. Many private student loans, by contrast, can give you a choice between a variable interest rate or a fixed interest rate. Typically, interest rates of subsidized and unsubsidized loans are relatively low. If you have a subsidized loan, you won’t need to even need to pay interest until after you’ve finished your undergraduate studies.
  • Federal benefits. You can also get access to flexible repayment plans such as income-based repayment plans. Some borrowers may even qualify for student loan forgiveness. However, certain requirements have to meet in order to obtain forgiveness, and this benefit should not necessarily weigh heavily in your decision to take out federal student loans. Federal loans are also flexible in the sense that they will allow you to defer payments if you’re having trouble paying on time.

Cons of Federal Student Loans

  • There is a limit to how much money you can borrow. The most significant limitation is the cap on the amount of money that you can borrow. If you are an undergraduate student, the most you can borrow each year ranges between $5,500 and $12,500. The amount varies based on your dependency status and your school year.
  • For the 2018-2019 school year, the average yearly tuition and fees for in-state, public college were $9,716, while the average cost for out-of-state public college was $21,629. The average tuition and fees for a private college, by contrast, hit a whopping $35,676. Depending on your financial situation and the school you’re attending, you may still need double or even triple the money that federal loans can provide.
  • Higher interest rates for graduate students. Graduate students are charged higher interest rates than undergraduate students when it comes to federal loans. Graduate students also don’t have the option to take out subsidized loans, which means that the government won’t pay your interest while you’re in school, either.

Private Student Loans

Due to the rising cost of college, many students find that federal loans don’t cover the full cost of attending. To fill that gap, many students will take out private student loans in addition to federal student loans. Private student loans may be offered by your university as well as by state agencies, banks, and credit unions. They may have fixed or variable interest rates and a variety of repayment terms, so it’s a good idea to shop around. Getting the best rates is dependent on factors such as credit history or whether there will be a cosigner.

Some common private lenders include credit unions and banks. Because credit unions are not-for-profit organizations, they may oftentimes offer lower interest rates than traditional banks. Community banks are also more willing to lend money at lower rates. They can also help with refinancing and consolidating other loans you’ve already taken out. LendKey offers private student loans through a network of banks and credit unions. Check out our private student loans page to learn more about your options.

Pros of Private Student Loans

  • Borrow up to the full cost of your education. Perhaps the largest advantage of taking out a private student loan is that you may be able to borrow enough money to cover the entire cost of your education.
  • Borrowing choice. You can obtain a private loan from a variety of lenders – this most likely includes your current bank or credit union. Some even offer interest rate reductions to borrowers with existing relationships.
  • Choose between a fixed and variable interest rate. With a federal loan, you’re offered a standard fixed rate. If you don’t want to be locked into a constant interest rate through changing market conditions, you could opt for a variable one. Having a cosigner with good credit may help you get an even lower interest rate than federal student loans offer.

Cons of Private Student Loans

  • You’ll probably need a cosigner. If you’re a recent high school grad with little to no credit history, you will typically need a cosigner. The lender needs assurance that the loan will be repaid and having a cosigner with a positive credit history helps demonstrate that.
  • Generally higher interest rates. Although you have the ability to choose between a fixed and variable rate, private loan interest rates are generally higher than federal ones. If you or your cosigner has excellent credit, there may not be much of a difference, if at all.
  • No federal benefits. If you take out loans through a private lender, you may not have access to the same benefits offered by the federal government. These can include income-based repayment plans, deferment options, and student loan forgiveness eligibility.

It’s Your Choice

If your total cost of education after scholarships amounts to more than the federal loan limit, you may have to take out private loans. Whether you choose to borrow the entire cost from a private lender or mix private student loans with federal student loans, make sure you do your research. To learn more about taking out student loans, visit our blog and follow our blog series throughout the summer!

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.