Federal vs. Private Student Loans

By Mark Kantrowitz

Total Federal and Private Student Loans (2014-2015)
Type of Student Loan	Amount of Debt
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 student loans.

• 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 periods.
• 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 frequently.
• Federal student loans offer several loan forgiveness options, including public service loan forgiveness, while private student loans do not.
• 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 repayment.
• 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 loans.
• 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 student loans.
• Up to $2,500 a year in interest on federal and private student loans is tax deductible as an above-the-line exclusion from income.
• Both federal and private student loans are almost impossible to discharge in bankruptcy.