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How Do Federal and Private Education Loans Differ?

While both options lend you money to help cover college costs, there are some significant differences between federal and private loans you need to know.

Sara Lindberg

Sara Lindberg
Freelance Writer
Former High School Counselor
You’ve been accepted to college—congrats! Now you need to find a way to fund your dream. While you figure out tuition and fees, room and board, and everything else related to college, you might be wondering if there’s a difference between federal and private education loans. While both options lend you money to help cover college costs, there are some significant differences you need to know about.

First, a federal loan is funded by the government. To qualify, you must complete and file the FAFSA. Federal loans generally come with better terms and benefits, such as fixed interest rates that are lower and income-driven repayment plans. If you meet the financial criteria, you may be eligible for a subsidized loan, which means the government covers the interest while you’re in school. You’ll begin paying off these loans after you graduate, leave school, or drop down to less than half-time.

Private student loans are offered by banks and independent lending institutions, which have their own requirements for approval and loan terms. Many will require a minimum credit score or a qualified cosigner to even apply. The terms and rates often vary depending on the institution funding the loan, but private education loans typically come with the option of a fixed or variable rate—both are generally higher than the rates offered by the federal government. Plus, some lenders require payment on both the principal amount and the interest gained while you’re still in school, so it’s best to start paying off these loans before you graduate if possible. Be sure to research any student loan before you sign on the dotted line.

Anna SerioAnna Serio
Certified Commercial Loan Officer and Senior Writer
Private student loans are designed to cover any costs left over after you’ve applied for federal student aid. That’s because private lenders just can’t compete with the rates and terms that the government offers. With federal loans, each borrower gets the same interest rate and has access to more flexible repayment options and opportunities for forgiveness than you can find with a private lender. 

That’s why most private student loan providers recommend you complete the FAFSA before you even consider applying. Federal student loans have their limits — there is a lifetime cap on how much you can borrow through most programs, and international students are ineligible. Most private lenders have credit and income requirements, so many students will have to apply with a cosigner. There are a few options available to international students and others who don’t have a cosigner, but these tend to come with higher rates and offer limited loan amounts.

Find more student loan advice in our Financial Aid—Ask the Experts section.

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