Federal vs. Private Student Loans 


Students seeking financial help beyond a grant or scholarship can seek two types of student loans: federal student loans and private student loans. The US government finances federal loans while private lenders provide private student loans. If you’re wondering which one to choose, this article will help you understand the differences between federal student loans vs. private student loans.

Private College Loans

Schools, credit unions, banks, and state agencies provide private student loans for financing higher education. The government does not back these loans, and the terms are set according to your circumstances. Private student loans are of two types: school channel and direct-student channel.

Usually, private student loans charge higher interest rates and have less repayment flexibility. So, why pay the extra premium? Students go to a private lender when they have maxed out their federal credit limits or missed the application deadline. Students who become ineligible for federal aid for failing to maintain Satisfactory Academic Progress (SAP) can also apply for private student loans. High-income students with good credit scores can get better interest rates and repayment terms by negotiating with the lender. Private student loans usually offer 6-12 months of no-payment grace period after leaving school.


  • Higher borrowing limit
  • Perks for deserving students with high creditworthiness


  • Higher interest rates, fees, and penalties
  • Non-flexible repayment terms

Federal Student Loans

The US Department of Education provides federal student loans to all US citizens studying for higher education. These loans are guaranteed by the DoE and require no credit checks. The US Congress decides the fixed interest rate of federal student loans each year. Federal student loans have favorable postponement options, income-driven repayment plans, and a lenient loan forgiveness policy. Federal student loans have a grace period of 6 months after you leave school. You can get a portion of your loan forgiven if you decide to work for public service. There are three types of federal student loans-

  1. Direct Unsubsidized loans – All undergraduate students are eligible. The school sets the credit limit.
  2. Direct Subsidized loans – Undergraduate students must demonstrate financial need to be eligible. Interest accrued while in school, deferment period, and grace period is paid by the government.
  3. Direct PLUS loans – Loans for eligible graduates/professional students or their parents to help fill expense gaps in cost of attendance (CoA).


  • Low-interest rate
  • Flexible repayment plans


  • Cap on borrowing limits
  • Non-bankruptable

Federal loans vs. private loans: comparison table

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Parameter Federal Student Loan  Private Student Loan
Loan Amounts Undergraduate students can get up to $57,500.

* Annual limit ranges from $5,500 to $12,500.

Graduate students can get up to $138,500.

* Annual limit is $20,500.

Interest Rates Federal loans have fixed interest rates.

  • Direct Subsidized/Unsubsidized loans for Undergraduates – 3.73%
  • Graduate/Professional- 5.28%
  • Direct PLUS Graduate/Professional/Parent – 6.28%

Loan Origination Fee –

  • Direct loans – 1.057%
  • PLUS loans – 4.228%
Fixed APR: 3%-13%

Variable APR: 1%-12%

Subsidies Students who demonstrate financial need are provided with Direct Subsidized Loans.

Maximum Subsidy Limit:

  • Undergraduates – $23,000 subsidy on max credit of $31,000.
  • Graduates – $65,500 subsidy on max credit of $138,000, including federal loans for undergraduate studies.
No subsidies offered on private student loans.
Credit Check No credit check is required while availing federal student loan. Depends on the private lender.