If you need to borrow money for college in the United States, you will usually choose between two types of loans: federal student loans from the U.S. Department of Education and private student loans from banks, credit unions and online lenders. They may look similar, but the differences can affect you for years.
What are federal student loans?
Federal loans are offered by the government. To get them, you fill out the Free Application for Federal Student Aid (FAFSA). Most undergraduate federal loans do not require a credit check, and the interest rate is fixed for the life of the loan. The same rate applies to every borrower who takes out that type of loan in a given school year.
What are private student loans?
Private loans come from lenders. Approval and interest rate depend on your credit history, so many students need a parent or other cosigner. Rates can be fixed or variable, and they can be lower or much higher than federal rates depending on your credit.
Key differences at a glance
| Feature | Federal loans | Private loans |
|---|---|---|
| Credit check | Not for most undergrad loans | Yes, often needs a cosigner |
| Interest rate | Fixed, set by law | Fixed or variable, based on credit |
| Repayment options | Several federal plans, including income-based options | Set by the lender, fewer options |
| Deferment and forbearance | Available in many situations | Limited, varies by lender |
| Forgiveness programs | Public Service Loan Forgiveness and others | Rarely available |
Which should you choose first?
For most students, the smart order is simple:
- Free money first – grants, scholarships and work-study.
- Federal loans next – because of their protections and flexible repayment.
- Private loans last – only to cover a gap that is left after everything else.
When a private loan might make sense
A private loan can help if you have already reached your federal loan limit, or if you (or your cosigner) have excellent credit and can get a lower fixed rate. Even then, remember you will give up federal benefits such as income-based repayment and certain forgiveness programs.
Questions to ask before you sign
- Is the rate fixed or variable?
- Are there origination fees?
- Can the cosigner be released later?
- What happens if I lose my job or go back to school?
- Is there a penalty for paying early? (There should not be.)
How federal loan interest rates are set
Federal student loan rates are not based on your credit score. Each year, the rate for new loans is set using the result of the 10-year U.S. Treasury note auction held in May, plus a fixed add-on amount set by law. The new rate applies to loans first paid out between July 1 and June 30 of the following year. Once you take the loan, your rate stays the same for its entire life, even if rates rise later.
This means two students who borrowed in different years may have different rates, but every undergraduate who borrowed in the same year has the same rate on the same type of loan. That fairness is one of the biggest advantages of federal borrowing.
How private loan rates are set
Private lenders look at your credit score, income, debt and sometimes your school and major. Students with little or no credit history often receive high rates or are denied unless they add a cosigner. A cosigner with strong credit can help you qualify for a lower rate, but they become legally responsible for the debt if you do not pay.
Private loans may offer a variable rate, which can start lower than a fixed rate but can rise over time with market interest rates. Over a 10-year repayment period, a variable rate that starts low can end up costing more than a fixed rate. If you choose a private loan, a fixed rate is usually the more predictable option.
Borrower protections that matter
Life does not always go as planned. You might lose a job, face a medical emergency or decide to go back to school. Federal loans include protections designed for these situations:
- Deferment: a temporary pause in payments during school enrollment, unemployment or economic hardship. On subsidized loans, interest may not grow during deferment.
- Forbearance: a short-term pause or reduction when you cannot qualify for deferment. Interest usually continues to add up.
- Income-driven repayment: payments linked to your income and family size rather than only your balance.
- Discharge: federal loans can be discharged in cases such as total and permanent disability or death.
- Forgiveness programs: Public Service Loan Forgiveness (PSLF) can forgive the remaining balance for qualifying government and nonprofit workers after 120 qualifying payments.
Private lenders are not required to offer these protections. Some offer limited forbearance or death and disability discharge, but you need to read the loan agreement to know for sure.
A real-life comparison
Consider Maria, a sophomore who needs $6,000 for the year. She qualifies for $4,500 in federal Direct Loans, leaving a $1,500 gap. Instead of taking a private loan for the full $6,000 because the lender advertised a “low rate,” she accepts the federal loans first and covers the remaining $1,500 with a small campus job and a local scholarship. She ends up with less debt, a fixed rate, and access to federal repayment options if her income is low after graduation.
This example shows why order matters. The cheapest and safest money should always come first, and private loans should fill only what is left.
How to compare private lenders
If you do need a private loan, shop around. Most lenders let you check your rate with a soft credit check that does not hurt your score. Compare at least three offers and look at:
- The annual percentage rate (APR), which includes fees
- Repayment term options, such as 5, 10 or 15 years
- Whether you must make payments while in school
- Hardship options and how long forbearance can last
- Customer reviews and complaint records with the Consumer Financial Protection Bureau
Frequently asked questions
Can I have both federal and private loans?
Yes. Many students have both. Just keep a list of each loan, its servicer and its rate so you can manage repayment later.
Can I turn a private loan into a federal loan?
No. Private loans cannot be moved into the federal system. However, federal loans can be refinanced into a private loan, which permanently removes federal benefits, so think carefully before doing that.
Do federal loans require a cosigner?
Most federal loans for undergraduates do not require a cosigner or a credit check. Parent PLUS loans do include a credit check for adverse credit history.
The bottom line
Federal loans are usually the safer choice because of their fixed rates and borrower protections. Use private loans carefully, compare several lenders, and borrow only what you truly need. You can check current federal loan rates and limits on StudentAid.gov.