Federal and Private Student Loans: What’s the Difference?
Learn more about your college financing options by understanding the difference between federal and private student loans.
Bottom Line Up Front
- College borrowers have loan options from both the federal government and private lenders, and each has a role to play in education financing.
- Federal loans are generally the first choice because they have better protections for borrowers, but they usually won’t cover all college costs.
- It pays to shop around for private loans because terms will vary, but they can make up the gap between federal loan amounts and the actual cost of attending college.
Time to Read
4 minutes
August 1, 2022
Deciding how you’ll pay for college is one of the most important decisions you’ll make.
Some students are able to finance college with savings, and some qualify for grants and scholarships. Still, others pay for college with federal student loans, private student loans or a combination. Let’s take a minute to look at the differences between federal and private student loans.
Federal student loans are funded by the federal government and may come with benefits and protections you won’t get through private lenders. These loans have fixed interest rates, meaning your interest rate will never change during the entire length of the repayment period. The first step is for you (and your parents, if you’re a dependent) to complete the Free Application for Federal Student Aid (FAFSA), which is available Oct. 1 each year. The FAFSA must be completed by the deadlines set by the federal government, your state and your school to be eligible for grants, scholarships and loans (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 like credit unions and banks. You’ll need to fill out an application, but unlike federal student loans, the financial institution (not the school) will determine if you qualify based on creditworthiness.
Why Consider a Private Student Loan?
Federal student loans don’t always cover all college costs. According to the U.S. Department of Education, undergraduate dependent students whose parents are eligible for Direct PLUS Loans are allowed a maximum of $31,000 in federal student loans to cover all 4 years of college, and independent students have a maximum borrowing limit of $57,500. When you compare these numbers to actual costs, you’ll see there could be a gap.
According to collegedata.com, for the 2021 academic year, the average cost of attendance for in-state public colleges averaged $27,330 per year and a moderate budget for private colleges averaged $54,800. That translates to roughly $109,320 for 4 years at an in-state public college and $219,200 for 4 years at a private college.
| Type | Estimated Cost for 4 Years | Total Funding Allowed: Federal Student Loans | Gap in Funding |
|---|---|---|---|
| Dependent student in state public college | $109,320 | $31,000 | $78,320 |
| Dependent student private college | $219,200 | $31,000 | $188,200 |
| Independent student in state public college | $109,320 | $57,500 | $51,820 |
| Independent student private college | $219,200 | $57,500 | $161,700 |
It’s clear, then, that federal loans may not cover all your costs. That’s where private student loans can help.
Keep in mind that 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. The chart below can help you compare the features of federal and private student loans.
Comparing Federal and Private Students Loans
| Feature | Federal Student Loans | Private Student Loans |
|---|---|---|
| Interest Rate Options | Fixed interest rates | Fixed or variable interest rates |
| Repayment Terms | Loan payments begin when you graduate, leave school or attend less than half-time | Varies by lender; monthly payments 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 credit score and report; without a good credit history, you may need a co-signer to qualify or to get lower interest rates |
| Tax Breaks | Loan interest may be tax-deductible (consult your tax advisor) | Loan interest may be tax-deductible (consult your tax advisor) |
| Repayment Options | Various repayment plans are available | Varies by lender |
| Loan Forgiveness | Eligibility depends on your situation | Typically not available |
Source: Federal Student Aid, an Office of the U.S. Department of Education, studentaid.gov
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.
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Disclosures
This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.