Federal vs. Private Student Loans: What's the Difference? | Navy Federal Credit Union

Federal vs. Private Student Loans: What's the Difference?

Learn more about your college financing options.

By: Navy Federal on June 14, 2017

A college education is an investment in your future that will last a lifetime, and deciding how you’ll pay your college costs is one of the most important decisions you can make. Are you wondering what options are available to you? Understanding your choices may save you money.

What Are the Most Common Ways Students Finance Their Education?

Although some students are able to finance college with savings and others qualify for grants and scholarships, many students pay for college with federal student loans, private student loans or a combination of the two.

Federal student loans are loans funded directly by the federal government. The first step in applying for federal aid is for you (and your parents, if you’re a dependent) to complete the Free Application for Federal Student Aid (FAFSA), which is available Jan. 1. The FAFSA must be completed by the deadlines set by the federal government, your state and your school. (Your college or university also might require a financial aid profile.) Once the application has been processed, your college’s financial aid office will determine how much federal aid you’ll receive.

Private student loans are loans provided through private financial institutions, such as credit unions and banks. Like a federal student loan, you must fill out an application, but unlike federal student loans, the financial institution will determine if you qualify for the amount requested, based on creditworthiness.

Why Consider a Private Student Loan?

Dependent students may borrow a total of $31,000 in federal student loans to cover all four years of college, and independent students may borrow a total of $57,500. According to collegedata.com, for the 2016-2017 academic year, a moderate budget for in-state public colleges averaged $24,610 per year and a moderate budget for private colleges averaged $49,320. That translates to roughly $98,440 for four years at an in-state public college and $197,280 for four years at a private college. It’s clear, then, that federal loans won’t always cover all students’ costs. Private student loans can fill that gap. Many college financing experts recommend completing the FAFSA first to see for how much federal aid you may qualify and then exploring options for private financing to help fill gaps. See the accompanying chart below to compare the features of federal and private student loans.

We’ll Help You Make the Grade

Navy Federal is committed to helping its members, and getting a good education can be an important step. That’s why we offer private student loans and helpful assistance, to ensure you make borrowing choices confidently. Learn more about private and federal student loans so that you can achieve your educational goals.

Feature Federal Student Loans Private Student Loans
Interest rate Fixed May be fixed or variable
Repayment period Begins when you graduate, leave school or attend less than half-time Varies by lender; repayment may be required while you're in school, which may reduce your overall cost of borrowing
Subsidies Undergraduate students with financial need may qualify for subsidized loans; the government pays the interest while you attend school at least half-time Typically no subsidies
Credit check Only for PLUS loans Loan approval is dependent on your creditworthiness; you may need a co-signer to qualify or to get the optimal interest rate
Tax breaks Interest may be tax-deductible (consult your tax advisor) Interest may be tax-deductible (consult your tax advisor)
Repayment options Various plans are available Varies by lender
Prepayment penalty fee None Varies by lender
Loan forgiveness Various plans are available Typically not available

Source: Federal Student Aid, an Office of the U.S. Department of Education, studentaid.ed.gov