College Financial Aid Advisors Scholarship

What’s the Difference Between Federal and Private Student Loans?

Share this post:

What’s the Difference Between Federal and Private Student Loans?

Before we know it, classes will begin for the fall semester nationwide on college campuses. Rising freshman and returning college students should already have their financial situation secure. By now, you will have received your financial aid package, know if you are eligible for the Federal Work-Study Program, and how much money you can anticipate in scholarships. If all of those numbers are still falling short, you may have to borrow money through student loans. Currently, you can borrow through  federal student loans, or private student loans which are offered by banks, credit unions and other organizations. While both accomplish the purpose of providing money to pay for college, be aware that there are some differences which could affect your future finances.

Here’s what you need to consider when deciding between federal and private student loans:

Interest Rates: 

Because they are offered through the federal government, iinterest rates on new federal student loans  are fixed and will remain the same for the life of your loan. Interest rates are currently the highest they’ve been in the past few years, post pandemic. Private loan lenders do not have the resources of the federal government. So they may have to charge higher interest than the government. If they do offer a lower variable rate for now, be aware that it could go up in the future.

Interest Subsidies: 

Students with financial need may qualify for Direct Subsidized Loans, which means that the government pays the interest for you while you are in school. In most cases, private student loans do not have subsidized interest, which means that you will be responsible for interest during your school years. This could add up to a substantial amount that will have to be repaid on top of your principal loan.

Deferred Payments:

Federal student loans allow you to wait until after graduation to begin repayment. While some private loans do this as well, there are others which expect you to make payments during your school years. Be sure to read the terms of any loan you’re considering carefully so you know what’s going on and when your payments are due. 

Credit Check: 

Most students do not have any credit history, so a big benefit of federal student loans is that they do not require a credit check or co-signer. Private lenders may require a credit check and co-signer if you do not have a credit background. This isn’t a huge deal, but definitely something to consider. If you’re a student reading this before college, consider working with your family to begin building a credit score for the future, too! 

Repayment and Postponement Options: 

Down the road, you might appreciate the wide array of repayment and postponement options that are available on federal student loans. They have a great deal of flexibility which allows you to work within your future budget parameters. You have to check with each private loan lender to determine their policies. 

Loan Forgiveness: 

There are several instances where you may be able to have your federal student loan debt forgiven. This is not usually the case with private loans. Obviously, this will continue to change in the next few years, so never plan to count on loan forgiveness but know that it can be possible with federal loans. 

Remember, you must first file the FAFSA to be eligible for federal student loans. The 2024-2025 FAFSA will open in December, so have everything ready to go. This year’s process will be accelerated because of the new simplifications and updates on the application. 

Who Are We?

CFAA helps with the financial aid process, from completing the FAFSA and completing the CSS Profile to reviewing the SAR, responding to requests for verification, comparing financial aid offers and understanding student loan options. Schedule a 15 Minute Power Chat to learn more about finding ways to pay for college.

Scroll to Top