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

Learn more about your college financing options.

By Navy Federal May 15, 2019

Deciding how you’ll pay your college costs 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 you may not have through private sources. Like any loan, you’ll need to repay the money with interest. 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 Oct. 1 each year. 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 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 for the amount requested, based on creditworthiness.

Why Consider a Private Student Loan?

The truth is 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 2017-2018 academic year, a moderate budget for in-state public colleges averaged $25,290 per year and a moderate budget for private colleges averaged $50,900. That translates to roughly $101,160 for 4 years at an in-state public college and $203,600 for 4 years at a private college.

Reasons to Consider a Private Loan
Type Estimated Cost for 4 Years Total Funding Allowed - Federal Student Loans Gap in Funding
Dependent student in state public college $101,160 $31,000 $70,160
Dependent student private college $203,600 $31,000 $172,600
Independent student in state public college $101,160 $57,500 $43,660
Independent student private college $203,600 $57,500 $146,100

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 Student Loans

Comparing Federal and Private Student Loans
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
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

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 you can achieve your educational goals.

This article 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.