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

Paying for your college education is expensive. And after applying for possible grants and scholarships, federal student loans are the most common next choice to ease the financial burden. They’re usually less expensive (and more generous) compared to private student loans, and you don’t need a co-signer or good credit to get them. Continue reading to further understand the difference between the two loan types. 

Federal student loans

Federal student loans are given to millions of student borrowers each year from the U.S. Department of Education. They generally have lower interest rates and fixed rates, which is another way of saying it’ll stay the same during your entire loan period. You can apply for a federal student loan as long as you’re enrolled as an undergraduate. The only type of federal loan that requires a credit check are direct PLUS loans, but more on that later.

Direct Subsidized Loans and Direct Unsubsidized Loans

Both direct subsidized and direct unsubsidized loans are available to students to help them afford the costs of their higher education. They work for four-year colleges or universities, community colleges, and trade or technical schools. But what’s the difference between the two?

Direct subsidized loans are known to have slightly better terms to assist students with financial need. Your school will determine the amount you can borrow, and the amount cannot exceed your financial aid. The U.S. Department of Education pays the interest on these types of loans while you’re in school at least half-time, for the first six months after you leave school (this is referred to as a ‘grace period’), and during periods of deferment (a.k.a. a postponement of your loan payment).

Direct unsubsidized loans are available to all undergraduate and graduate students and there is no need to meet financial aid requirements. Similar to subsidized loans, your school will determine how much you can borrow based on the cost of your attendance and any financial aid you receive. You are responsible for paying all the interest on this type of loan. 

Both types of loans require you to be enrolled at least half-time at a school that participates in the Direct Loan Program. 

Direct PLUS Loans

Direct PLUS loans are federal loans that help graduate or professional degree students or the parents of dependent undergraduate students pay for their higher education expenses. They have a fixed interest rate and aren’t subsidized, so the interest will accrue will the student is in school.

You will also have to pay an origination or process fee that is deducted from the loan disbursement before you or the school receives the loan funds. Plus, a credit check is run for all applicants to see if they qualify.

There are two types of Direct PLUS loans: Grad PLUS loans and Parent PLUS loans. We’ll explain the difference:

Grad PLUS Loans

Grad PLUS loans are for graduate and professional students to help cover the costs of their education that aren’t already covered by other financial aid or grants, up to the full cost of their attendance. To qualify, you must be enrolled at least half-time at an eligible school in a graduate program, pass a credit check, and meet any other general eligibility requirements for federal student aid.

Parent PLUS Loans

Parent PLUS loans enable parents or dependent students to borrow money that will cover any costs not already paid for by the student’s financial aid package, up to the full cost of attendance. There is no cumulative limit to how much parents are allowed to borrow. Parents hold all the financial responsibility of paying back this type of loan after their child/student has completed school. To qualify, you must be the biological or adoptive parent of a student enrolled at least half-time at an eligible school. Grandparents, unfortunately, are not eligible for this type of loan. 

You must also pass a credit check. If you do not pass, you can still be approved if you get an endorser or are approved by the Department of Education through an explanation of your circumstances. 

And lastly, you must meet the general eligibility requirements for federal student aid. Parent PLUS loans do not have a ‘grace period,’ or time frame when you don’t have to make payments. Parents have to start repaying their loan as soon as it’s disbursed to the student or school, however, they can request to delay any payments while their child is in school for an additional six months after graduation, their child leaves school, or drops out below half-time enrollment by requisition a deferment. That said, parents are still responsible for any interest that acres while their payments are postponed.

Private (non-federal) student loans

Private student loans are a non-government option when grants, scholarships, and federal student loans aren’t enough to cover the cost of your higher education. They come from banks, credit unions, or other financial institutions and help cover the costs of tuition, fees, books, housing, and more.

Each lender has their own requirements of eligibility, including things like income, credit scores, and repayment terms. This makes private loans a little bit more difficult to qualify for, as you typically need good or excellent credit to obtain one. It also helps to make sure you have a high income and low debt-to-income ratio.

Lenders want to see that you’re a reliable and responsible person who will make timely payments. In most cases, you have to be at least 18 years old and have U.S. citizenship to qualify. International students may be eligible if they have a U.S. citizen co-sign their loans, but it depends on the lender. 

Differences between federal and private student loans

The biggest difference between federal and private loans is where the money comes from. Federal student loans are granted by the government and have terms and conditions that are established by law. They include benefits like fixed interest rates and income-driven repayment plans. Private loans, however, are given by private financial institutions like banks and credit unions or state-affiliated organizations. Their loan terms and conditions are determined by the lender and they are typically more expensive than going the federal route.

Interest rates

The interest rate for federal student loans is fixed and most times, lower than private loans, and much lower than some credit cards. For private loans, the interest rates can be either variable or fixed depending on the lender. They can also be higher or lower compared to federal loans depending on your financial circumstances.

Repayment plans & when payments are due

Federal student loans are due after you graduate, leave school, or change your enrollment status to less than half-time. Many private student lenders require you to make payments on your loan while you are still in school. Be sure to check if deferment is an option for while you’re in school.


It’s possible you can qualify for a subsidized loan if you meet certain financial need requirements. This is when the government pays the interest on your loan while you’re in school (for at least a half-time basis). Private loans, however, are most times not subsidized–which means you’re responsible for all the interest on your loan.

Credit inquiries & established credit

Another huge benefit of federal student loans is you don’t need a credit check or established credit to qualify (with the exception of PLUS loans). The government will check your credit if you’re applying for a PLUS loan, but there are still ways to obtain this kind of loan even if you have bad credit. Private student loan lenders tend to always require a credit record or a cosigner before approving you.

When to consider a private student loan

Our rule of thumb–students should only begin the private loan process if they’ve maxed out their federal student loans and financial aid. This way, they’ll still be able to access income-driven repayment plans if need be, as well as qualify for protections like forbearance and deferment.

Consider applying for the Free Application for Federal Student Aid (FAFSA), which could provide helpful grants, work-study programs, and other forms of student aid. If you find yourself still needing more money for your education, even things like child care or transportation, then consider private student loans.If you decide to move forward with a private lender, be sure to only borrow what you need. The more you borrow, the more you’ll owe after graduation.

Other instances when private loans make sense might be if you have a specific budget to repay the borrowed money in a short amount of time. Or, if your expenses suddenly change (i.e. you need more money for books and rent) and you’ve used up all your federal loans. Then, private loans could help you get more money, and fast. Again, just be sure you have the income to make your payments!

Abigail Masterson

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