College tuition and room and board costs keep rising—the average in-state bill for students at public four-year schools rose by 2.6% from 2018-19 to 2019-20—so it’s no surprise that many students continue to need help paying for college.
In fact, according to the Federal Reserve, 43% of those who attend college have to acquire some debt in order to cover their education costs, with student loans being by far the most common type of debt used to pay for college.
When deciding how you’re going to pay for higher education, there’s a reasonable chance that you will have to get student loans. Understanding how to choose between federal and private student loans—and when you might use both—can help you make the right decision for your long-term education and financial situation.
Federal vs. Private Student Loans
As you might expect, federal student loans are offered by the U.S. government, while private student loans originate from lenders in the private sector. While the government chooses others, called servicers, to administer the terms of the loans, the government still originates the loans and sets the terms.
The table below can help you compare some of the characteristics of federal undergraduate student loans with those of private undergraduate student loans.
|Federal Student Loans||Private Student Loans|
|Loan limits||Undergrads: $5,500–$12,500 annually, depending on year in school. Grads: $20,500||Up to 100% of the cost of college tuition and living expenses|
|Interest rate||4.53% for undergraduates. 5.28% for grads and professionals. 6.28% for Direct PLUS Loans||Variable rates as low as 2.72%|
|Credit requirements||No, for most||Yes|
|Income-driven repayment options||Yes||No|
|Forgiveness options for those who qualify||Yes||No|
With federal student loans, the terms are uniform and apply to everyone receiving them. Private loans, though, have varying terms and criteria, based on individual lenders as well as the circumstances of the borrowers.
Federal student loans have a fixed interest rate, so you know that the loan you receive each year has a set rate, no matter what happens in the market.
Benefits of Federal Student Loans
That rate is determined by a formula set forth in federal law and changes once a year. Borrowers don’t have to worry about meeting credit requirements or having a loan application rejected.
Additionally, those who meet certain criteria might also be eligible for subsidized student loans. With subsidized loans, the government covers the cost of your interest while you attend school. This can potentially save you hundreds—or even thousands—of dollars when you graduate.
With unsubsidized loans, interest begins accruing the day the loan is disbursed. If you don’t make interest payments while you’re in school, all of that interest is added to your loan balance when it’s time for you to start repayment.
On top of providing stability and potential subsidies, federal student loans often come with flexible repayment options. It’s possible to enter an income-driven repayment plan, which sets your monthly payments based on your income, allowing you to remain current, even if you’re unable to afford your original payment.
Finally, there are a number of federal student loan forgiveness options that can give you a way to have a portion of your student loan balance erased.
Fixed interest rate, no matter what your credit rating
No need for a credit check (or co-signer)
Flexible repayment options
Ability to qualify for potential loan forgiveness
No way to get a lower interest rate based on your credit score
Lower loan limits
Caps on subsidized loan amounts
Income-driven repayment can result in being in debt longer
Benefits of Private Student Loans
Because private student loans are offered by banks, credit unions, and even state-based programs, they have different criteria. One of the benefits, though, is that you might be able to qualify for a higher loan amount than the limits imposed by federal loans. For example, lender SoFi promises to cover up to 100% of the school-certified cost of attendance (although you need to borrow at least $5,000).
Additionally, with private student loans, there’s a chance that you might be able to get a lower interest rate if you have good credit.
Even if you don’t have enough of a credit history to qualify for a lower rate (or a higher loan amount), you might be able to get a good deal on a loan if you have a co-signer who meets the criteria set by the lender.
Finally, some lenders offer various perks and benefits that might help you, depending on your situation. For example, CommonBond offers a forbearance program if you can’t make your payments, and SoFi offers access to additional services, like career coaching.
Potential for lower interest rates with good credit
Higher loan limits
Access to additional programs and services
Fewer repayment options
Variable interest rates could rise with market changes
Potential to be rejected
No subsidies available
No forgiveness programs
How to Decide Between Federal and Private Student Loans
For many students, it’s not actually a matter of choosing between federal and private student loans. Instead, there’s a good chance that you might need to use both types of loans to cover your college costs.
Consider starting with applying for federal student loans. If you qualify for subsidized student loans, those can save you a great deal of money in the long run. Next, max out your unsubsidized loan eligibility. With the average annual cost of four-year public colleges at $10,440 in 2019-20, you might still be experiencing a college funding gap after reaching the federal loan limit.
Private student loans can help fill that gap. However, it’s important to realize that you might need a cosigner if you don’t have an established credit history, and it’s vital to review the terms of the loan to see if they will fit your needs. Federal student loans come with extra protections and options, so it makes a lot of sense to focus on those first and supplement with private student loans if needed.
When to Focus on Private Student Loans First
There are times when it can make sense to choose private student loans without getting federal loans first. For the most part, though, that applies when you have excellent credit and you qualify for an interest rate that is lower than the current rate on federal loans—or you have a cosigner with excellent credit willing to help you out.
If this is the case, see if you can get a fixed rate on your loan, and double-check to make sure you can put off payments until you finish school. Also, find out if there are hardship and deferment options, just in case you run into financial trouble after you graduate.
Carefully consider your options and weigh the pros and cons of federal and private student loans. Take into account your situation, and the potential protections and benefits available from different loan options.
Don’t forget, too, that you can look for ways to avoid taking out student loans, or at least reduce the amount you borrow. Apply for scholarships and grants, and save up what money you can before starting school. Planning ahead could help you borrow less, reducing the need for student loans.