Federal vs. Private student loans: what are the differences?


  • Federal student loans and private student loans have different advantages and disadvantages.
  • In general, federal loans are a better deal because they offer more protection and lower fixed rates.
  • However, federal loans come with a origination fee, while most private lenders do not charge them.
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You should always try to take advantage of free or low-cost financial aids, such as grants, scholarships, or work-study programs. But your aid program may not always come with enough money to cover tuition costs. This is where student loans come in.

Student loan debt has exploded as education spending has continued to rise year on year, so if you’re forced to choose between different types of loans, you’re not alone.

There are two main types of student loans: federal and private. Here are the differences, along with tips for choosing the best option for you.

Federal student loans vs private student loans

* If you have an adverse credit history, you may need to find an “endorser,” similar to a co-signer, to take out a loan.

Federal and private loans are options for withdrawing money that you will later repay to cover tuition costs. With Federal Student Loans, your lender is the government, while your lender is a private business with private student loans.

Here are the three types of federal student loans:

  • Direct subsidized loans. These loans are available to undergraduate students who demonstrate financial need. The government will pay interest on your loans while you are in school at least part-time, for the first six months after leaving school, and during a deferment period. Deferral is a temporary break in your student loan payments for special situations such as active duty military service and re-enrollment in school.
  • Direct unsubsidized loans. Undergraduates, graduate students, and professional students can get these loans, although eligibility is not dependent on financial need. Interest will accrue on unsubsidized direct loans while you are in school, during your grace period or deferral period, but you will not have to pay this interest until your repayment period begins.
  • PLUS direct loans. Graduate and professional students, as well as parents of undergraduates, can take out these loans. Eligibility is not based on financial need. You will need to pass a credit check and meet additional requirements to qualify if you have an adverse credit history.

Pros and Cons of Federal Student Loans

Pros and Cons of Private Student Loans

How to apply for a student loan

The government will ask you to complete the Free Federal Student Aid Application, or FAFSA, to determine your eligibility for federal student loans. There is a federal deadline for help each year, and many states and colleges also set deadlines for the help they administer. You will complete this online form and should have the following information handy:

  • Social Security number
  • Your federal income tax returns, W-2 and other documents of money you have earned.
  • Bank statements and investment records (if applicable)
  • Registers of untaxed income
  • An FSA identifier
  • If you are not a U.S. citizen, your alien registration number

Private lenders have different requests for help which you can find on their websites. The information you need will vary by company, but you will likely need to have similar documents verifying your identity and income. Private lenders will perform a credit check to determine your loan eligibility, just like the federal government does with Direct PLUS loans. Ask your specific lender for details.

Federal and private student loans can be good options if you are looking for a way to pay for your education, just keep in mind that federal loans often offer better terms and protections than private loans.