The Difference Between Federal and Private Student Loans
Paying for college can feel overwhelming, especially when you start comparing tuition, financial aid and loan options. If you need to borrow money for school, one of the first things to understand is the difference between federal and student loans.
What Are Federal Student Loans?
Federal student loans are funded by the U.S. Department of Education. They are designed to help students and families pay for eligible education expenses and generally offer borrower protections that may not be available with private loans.
To apply for federal student aid, students typically complete the Free Application for Federal Student Aid (FAFSA). The FAFSA helps determine eligibility for federal financial aid, which may include grants, scholarships, and federal loans.
What Are Private Student Loans?
Financial institutions like banks and credit unions, not the federal government, offer private student loans. They can be used to help cover education costs when savings, scholarships, grants, and federal financial aid don’t cover the full cost.
Key Differences to Consider
One of the biggest differences between federal and private student loans is who provides the loan. As stated above, federal student loans come from the federal government, while private student loans come from financial institutions.
There are also differences in eligibility. The FAFSA and federal program requirements generally determine federal student aid. Private lenders establish their own eligibility requirements, which may include credit and income criteria.
Interest rates can differ as well. Federal law sets student loan rates, which may vary by loan type and year of disbursement. Private lenders set their own rates, which can vary based on the borrower’s creditworthiness and other factors.
Repayment flexibility is another important consideration. Federal loans generally have access to a broad range of federal repayment programs and borrower protections. Private loan options depend on the individual lender and the terms of the loan.
Which Should You Choose?
For many students, that answer isn’t necessarily one or the other. Federal student loans may be worth considering first because of their repayment protections and potential flexibility. However, federal aid may not cover the entire cost of attendance.
That’s where private student loans may help fill the gap. If you are considering a private loan, compare lenders carefully rather than choosing based solely on the interest rate. Look at the annual percentage rate, repayment term, monthly payment, fees, co-signer requirements and available repayment options.
It can also be helpful to estimate what your monthly payment could look like after graduation. Borrowing more than you need can increase the amount you’ll have to repay later.
We’re Here to Help
Every spring, we open applications for our Dollars for Scholars scholarship program. We award several members for their hard work and dedication, helping them continue with their schooling.