Federal or Private Student Loans: Which is Best for You?

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If you need loans to pay for your college education, it’s important to know the differences between federal and private student loans. (Shutterstock)

When it comes to borrowing for your education, you have two main options for student loans: federal and private. Each type of loan has its pros and cons, and which one you need will depend on your financial situation.

Here’s what you need to know about federal vs private student loans, including your repayment options for each.

If you need a private loan to cover your education funding gaps, visit Credible to view your prequalified student loan rates from various private lenders, all in one place.

Federal vs Private Student Loans

The Department of Education provides federal student loans. Their rates, terms and repayment plans are set by law. They come with several benefits, including income-driven repayment plans and student loan forgiveness. And only Parent or Grad PLUS loans require a credit check.

The US Department of Education offers several types of federal student loans, each with different requirements:

  • Subsidized direct loans — Undergraduate students who can prove financial need are eligible for this type of federal loan. The federal government pays accrued interest while you are enrolled at least half-time in school, when you defer your loans, and during the six-month grace period after you leave school.
  • Unsubsidized Direct Loans — Like Subsidized Loans, Direct Unsubsidized Loans are for undergraduate students. But they’re not based on financial need, and the government doesn’t pay accrued interest, even if you’re enrolled at least half-time. You are responsible for all interest on the loan.
  • Direct PLUS loans for graduate and professional students — Also known as Grad PLUS and Parent PLUS loans, these loans are credit checked. But borrowers may still be able to qualify for a loan, even with a bad credit history. Although interest accrues, borrowers do not need to make any payments during the grace period after graduation or when enrolled at least half-time.
  • Direct PLUS loans for parents — Parents who want to help pay for their child’s education can take out this type of federal student loan up to the amount of tuition, minus any financial assistance they have received. Unlike Grad PLUS loans, borrowers are responsible for payments once the loan is disbursed.

Private student loans, on the other hand, are made by private organizations, such as banks and credit unions. Lenders set these terms and loans can have variable or fixed rates. Eligibility requirements include your credit history and income. Unlike federal student loans, private loans generally have no loan forgiveness and can be more expensive than federal loans, depending on factors such as your credit score and repayment duration.

Advantages and Disadvantages of Federal Student Loans

Before applying for either type of loan, consider the following pros and cons of federal student loans:


  • Come with unique benefits — If you qualify, you may qualify for benefits such as income-tested repayment plans and student loan forgiveness.
  • Lenient credit check requirements — Subsidized and unsubsidized direct loans do not require a credit check. Although PLUS loans do, they can still qualify borrowers with poor credit histories.

The inconvenients

  • Loan limits may not be enough — Whereas federal loan limits are only up to the participation fee, it may not be enough to cover your total costs.
  • Not everyone is eligible for subsidized loans — Those who do not demonstrate financial need will only be eligible for unsubsidized loans, meaning interest will continue to accrue during deferment periods.

Advantages and disadvantages of private student loans

Private student loans also have pros and cons that you’ll want to consider:


  • May qualify for lower rates — Applicants or their co-signers who have excellent credit may receive less interest rate compared to federal loans, helping them save thousands of dollars over the life of the loan.
  • Higher borrowing limits — Private student loans are a common way to fill funding gaps due to restrictions on federal loan limits, which is helpful if you’re enrolled in a more expensive program or school.

The inconvenients

  • No income-driven plans or loan forgiveness – Some private lenders may offer deferral options if you’re having financial difficulty, but you won’t get benefits like capping payments based on a percentage of your income.
  • Borrowers will most likely need a co-signer — If you do not have good credit or do not earn enough income during your studies, you will most likely have need a co-signerwhich may not be able to be released from the loan depending on the lender.

In general, consider private student loans if federal scholarships, grants, and loans don’t cover the amount you need to borrow. You will want to exhaust your financial aid and federal loan options first.

If you’re ready to apply for a private student loan, Credible makes it easy to see your prequalified student loan rates from several lenders.

Differences Between Federal and Private Student Loan Repayment Plans

Private and federal student loans offer different types of repayment plans. However, those from private lenders vary depending on the lender, while federal loans are the same type – the qualification criteria are the same for all borrowers.

Since each private lender has their own repayment plans, it’s important to pay attention to them so you can understand what your options are if you run into financial difficulty.

For federal loans, the Department of Education offers four main types of income-based repayment plans:

  • Revised Pay As You Earn (REPAY) plan
  • Pay As You Earn (PAYE) Reimbursement Plan
  • Income Based Reimbursement Plan (IBR)
  • Income Contingent Repayment (ICR) Plan

Each repayment plan typically has monthly payments ranging from 10% to 20% of your monthly discretionary income. You will need to subscribe to one of these plans, and the eligibility requirements differ from plan to plan.

For example, if you can prove that your federal loan repayments will represent a significant portion of your annual discretionary income, you may qualify for the PAYE and IBR plans.

Whichever repayment plan you end up qualifying for, your monthly payments will fluctuate based on your annual income. Each year, you will be required to submit updated income information to your loan officer so that it can calculate an updated monthly payment amount.

Whether you are the borrower or the co-signer, Credible allows you to compare student loan rates from multiple private student loan providers without affecting your credit score.