Federal vs. Private Student Loans
By Mark Kantrowitz
|Total Federal and Private Student Loans (2014-2015)|
|Subsidized Federal Stafford Loans (Undergraduate)||$23.2 billion|
|Unsubsidized Federal Stafford Loans (Undergraduate)||$24.4 billion|
|Unsubsidized Federal Stafford Loans (Graduate)||$23.9 billion|
|Federal Parent PLUS Loans||$10.4 billion|
|Federal Grad PLUS Loans||$7.5 billion|
|Federal Perkins Loans||$1.2 billion|
|Private Student Loans||$10.1 billion|
There was about $100 billion in federal and private student loans
disbursed in 2014-2015, with $90.6 billion in federal student loans
and $10.1 billion in private student loans.
Students should borrow federal first, because, generally, federal
student loans are cheaper, more available and have better repayment
terms than private student loans.
There are several important differences between federal and private
- Federal student loans have fixed interest rates, yielding
predictable monthly loan payments. Some private student loans have
fixed rates and some have variable rates.
- Some federal student loans provide a subsidized interest
benefit, where the federal government pays the interest during the
in-school period, grace period and other authorized deferment
- Federal student loans have several provisions for borrowers who
are encountering financial hardship, including deferments,
forbearances and income-driven repayment plans.
- When a borrower doesn't pay the interest on an unsubsidized
loan as it accrues, the unpaid interest is capitalized (added to
the loan balance). This can occur during a deferment or
forbearance. Unpaid interest on federal student loans is capitalized
once, at the end of the deferment or forbearance period. Unpaid
interest on private student loans may be capitalized more
- Federal student loans offer several loan forgiveness options,
including public service loan forgiveness, while private student loans
- Federal student loans do not involve credit scores, minimum
income thresholds or maximum debt-to-income and debt-service-to-income
ratios. The Federal PLUS loan, however, does require the borrower to
not have an adverse credit history.
- Federal student loans do not require the borrower to have a
creditworthy cosigner. More than 90% of private student loans to
undergraduate students and 75% of private student loans to graduate
and professional school students require cosigners.
- Federal student loans offer more flexible repayment plans,
including income-driven repayment, graduated repayment and extended
- Federal student loans provide deferments and forbearances for
up to three years in duration. Most private student loans limit
forbearances to one year in total duration.
- Federal student loans provide death and disability
discharges. Not all lenders offer similar benefits on private student
- Private student loans offer personalized pricing, such
as lower interest rates for borrowers with better credit scores and
students who are enrolled in more lucrative academic majors at elite
colleges and universities.
- Private student loans may be less expensive than Federal PLUS
loans for borrowers (or cosigners) with very good or excellent credit
(e.g., 750+ credit scores). Otherwise, private student loans may have
higher costs than federal student loans.
- Private student loans have higher annual and aggregate loan
limits than federal student loans.
- Most private student loans do not charge loan fees, such as
origination and guarantee fees.
- Private student loans do not require the student to file the
Free Application for Federal Student Aid (FAFSA).
- Private student loans do not depend on financial need.
- There are no prepayment penalties on federal and private
- Up to $2,500 a year in interest on federal and private student
loans is tax deductible as an above-the-line exclusion from
- Both federal and private student loans are almost impossible to
discharge in bankruptcy.