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Federal Student Loan Vs Private Student Loan: Which Is Better?

By Sunayna Kanjilal
Updated On : 01:36 PST, Nov 14, 2023

Federal Student Loan Vs Private Student Loan: Which Is Better?

Cover Image Source: Pexels | Tirachard Kumtanom

Editor's note: This article was originally published on May 31, 2023. It has since been updated.

With the fall semester approaching, students are looking at securing financial assistance. Scholarships and grants are always in demand as they don't require repayment. However, the amount offered in this case, more often than not is just not enough. Enter, loans. Students have two options when it comes to loans: Federal student loans and private loans.

What Is a Federal Student Loan?

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Federal student loan is directly offered by the US Department of Education. They are easier to qualify for than private student loans. "They have flexible repayment options including income-driven repayment plans, offer forgiveness and loan discharge options, and interest rates are not based on credit — rather by law," says Elaine Rubin, director of communications for Edvisors, as per CBS news.

Another important thing to note about federal student loans is that the interest rates never change. "Federal student loans include various benefits that most private loans do not, like need-based subsidies that prevent interest from accruing while a student is enrolled and fixed interest rates," said Patricia Lopez, director of financial aid and student loans at Santa Clara University.

What Is a Private Student Loan?

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The term is self-explanatory, private loans are issued by privately owned companies. Private loans often require a credit check and a co-signer. In private loans, credit score plays a huge role. For this very reason, the interest rates are generally higher as compared to federal loans, which are subsidized by the governments and non-credit-dependent.

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Federal Student Loan Vs Private Student Loan

In most cases, students look at all the options available under the first category before moving on to the latter. This is because the interest rates on federal loans are lower and way more affordable. On top of this, students will also have access to income-based repayment plans and potential student loan forgiveness if they take up certain professions.

To qualify for a federal loan, one must complete and submit the government's Free Application for Federal Student Aid (FAFSA).This application portal (FAFSA) asks the student a series of questions about their financial background, current investments, and other relevant matter such as other siblings who are planning to go to college, etc. Using this information they calculate the level of financial assistance the candidate requires, as per Investopedia.

Types of Federal Loans:

The William D. Ford Federal Direct Loan program is the best of all federal loan programs. The four best types of federal loans are:

Direct Subsidized Loans: The loans are given on the basis of financial needs and interest rates are subsidized accordingly.

Direct Unsubsidized Loans: These loans are offered to students regardless of their financial needs.

Direct PLUS Loans: These are loans that a graduate or a professional student and parents of dependent undergraduate students can use.

Direct Consolidation Loans: This gives the candidate the flexibility to combine two or more federal loans into a single loan with a fixed interest based on the average rate of loans issued to the candidate.

In the case of private loans, there is no one source that the money comes from. This means the students will have a lot of flexibility. These loans also come with higher borrowing limits. Everything is subjective when it comes to this category. All the rules and criteria vary from one company to another, some may defer the student's payment until after they graduate, and some lenders require the student to begin repaying as soon as they begin their program.

The Bottom Line

Nothing is set in stone when it comes to choosing the right loan. Everything depends on how the student uses the resource. Like almost everything in this world, even these loans have their own set of pros and cons, and you won't be able to conclude which is the best for you unless you weigh them according to your needs.