When it comes to loans, you’ll have to decide between private vs federal student loans. What are the differences between the two? Is one better than the other?
Private vs. Federal Student Loans
Browse through the federal student loans vs private student loans comparison chart to see how both types of loan stack up head-to-head.
|Federal Student Loans||Private Student Loans|
|Lender||U.S. Department of Education||Banks, Credit Unions, School, etc.|
|Interest Rates||5.05%||Varies, typically lower than Federal|
|Fixed or Variable Rates?||Fixed||Fixed & Variable|
|Loan Fees||1.062% – 4.248%||Varies by lender|
|Loan Terms||Up To 25 Years||Up To 25 Years|
|Credit Check?||No, except for PLUS loans||Yes|
|Co-Signer||No||Varies, often yes.|
|Grace Period||Yes, 6 months||Varies, usually 6 months.|
|Direct PLUS||Parents and Graduate or Professional||7.6%|
|Repayment Plan Options||Yes||No|
|Consolidation & Refinancing||Consolidation only||Yes|
|Prepayment Penalties||No||Typically No|
|Interest Tax Deduction||Yes||Yes|
How Do I Get a Federal Student Loan?
You don’t exactly “apply” for a federal student loan. Instead, you file the FAFSA and wait to receive a financial aid package from the college(s) you applied to. Your FAFSA will tell you what type of federal student loans you are eligible for and how much they’re worth. It will also contain information about Parent PLUS loans for parents interested in federal borrowing. You can later access all your loan data in the National Student Loan Data System.
Just because you’re offered federal student loans doesn’t mean that you’re required to borrow them. You can accept as much or as little of your financial aid package as you want. You might already have money saved up or a college savings plan that you’d like to use first. In some cases, it might even be better to take out a private loan instead.
If you choose to borrow, you’ll need to sign a promissory or master promissory note. Essentially, it’s a binding contract stating that you understand the loan terms and agree to pay the money back. For the most part, you’ll only need to sign it once to cover all of the direct loans you take out within a consecutive 10-year period. You can sign the Master Promissory note online. It only takes about 30 minutes to fill out.
What are the Interest Rates and Fees for Federal Student Loans?
Federal student loans have fixed, pre-determined interest rates. They stay the same throughout the life of the loan. Rates for new student loans tend to change year-to-year. It all depends on congressional legislation. You can view the most up-to-date federal student loan interest rates here.
The chart below gives you an idea of the interest rates for Direct Loans first disbursed on or after July 1, 2018 and before July 1, 2019 and the loan fees for Direct Loans first disbursed on or after October 1, 2018 and before October 1, 2019.
|Loan||Borrower||Fixed Interest Rate||Loan Fee|
|Direct Unsubsidized & Unsubsidized||Undergraduate||5.05%||1.062%|
|Direct Unsubsidized||Graduate or Professional||6.6%||1.062%|
|Direct PLUS||Parents and Graduate or Professional||7.6%||4.248%|
Most federal student loans also have loan fees. These fees are simply a percentage of your total loan amount. Each time a loan is disbursed, the fee gets taken out. You won’t notice anything happening because you aren’t paying the fee out of your bank account. Instead, you just end up receiving less money than you’re actually borrowing. Unfortunately, you still have to pay back the whole amount.
Types of Federal Student Loans
The U.S. Department of Education offers several types of federal student loans. Loans are classified based on need and borrower type.
Direct Subsidized Loans are for undergraduate students who demonstrate financial need. Your college determines how much you’re eligible for, but the amount cannot exceed the federal borrowing limit. The U.S. Department of Education pays the interest on these loans while you’re in school, during your grace period, and during a period of deferment. These loans are more manageable than unsubsidized loans.
Direct Unsubsidized Loans are for undergraduate and graduate or professional students. The government doesn’t pay any interest on these loans, so it accumulates while you’re in school just like private student loan interest does.
Direct PLUS Loans are for parents and graduate or professional students. They are unsubsidized and more expensive to take out due to their higher interest rates and loan fees.
You can’t borrow infinite amounts of money from the federal government. Each loan program has a yearly and aggregate loan limit based on the type of loan you take out and your status.
The yearly limits are as follows:
|Stafford Loan Limits for Dependent Students: $31,000 aggregate loan limit for undergrads with no more than $23,000 from subsidized loans|
|Stafford Loan Limits for Independent Undergraduate Students: $31,000 aggregate loan limit with no more than $23,000 from subsidized loans|
|PLUS and Grad PLUS Loan Limits: Amount borrowed cannot exceed the total cost of attendance minus any other financial aid received|
Federal student loans come with a standard 10-year repayment term. You can alter the loan term by signing up for one of the many available repayment plans. The longest loan term available through the federal government is 25 years.
All federal student loans come with a grace period. This is a six-month chunk of time between when you graduate, leave school, or drop below half-time enrollment and when you must make your first payment. It gives you time to move and find a job before payments start. During your grace period, subsidized loan interest is still paid for by the U.S. Department of Education, but unsubsidized loan interest continues to accumulate.
Your loan automatically enters the standard 10-year repayment plan after your grace period finishes. But, that’s not your only option. The federal government offers several repayment plans that help reduce the monthly burden of student loan costs. In the big private vs federal student loan debate, repayment plans are the most noticeable difference between the two. Some plans even offer loan forgiveness after a set number of years. You won’t find these options from a private loan company.
Here’s a brief overview of the plans:
Pay As You Earn (PAYE): This plan caps monthly loan payments at 10% of your discretionary income. It’s only for borrowers demonstrating financial hardship who took out their first loan on or after October 1, 2007 and took out a direct loan after October 1, 2011. Undergraduate loans can be forgiven after 20 years and graduate loans in 25 years.
Revised Pay As You Earn (REPAYE): REPAYE also caps your monthly payments at 10% of your discretionary income. It’s ideal for borrowers with high incomes and a lot of student debt. REPAYE forgives your undergraduate loans after 20 years and your graduate loans after 25 years.
Income-Based Repayment (IBR): The IBR plan bases your monthly payment on your family size and income. It doesn’t take how much you owe into account. New borrowers as of July 1, 2014 pay no more than 10% of their discretionary income and earn forgiveness after 20 years. If you borrowed prior to July 1, 2014, you’ll pay no more than 15% of your discretionary income. Forgiveness comes after 25 years. Under IBR, you could end up owing $0 each month.
Income Contingent Plan (ICR): Your monthly payments are the lesser of 20% of your discretionary income or “what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.” Your new payment amount gets spread across a 25-year loan term with complete forgiveness granted after 25 years.
Graduated Income Repayment Plan: Under this plan, you’d pay off your federal student loans within 10 years. Monthly payments start out lower to match a more entry-level income and gradually increase every two years. Although you do pay back your loans in the same amount of time as the standard repayment plan, you end up paying more money.
Extended Income Repayment Plan: Borrowers with a lot of federal loans might quality for this plan. You choose a new loan term of up to 25 years with the goal of making monthly payments smaller and more affordable. The longer your term, the more interest you pay over the life of the loan. It’s recommended to go with the smallest term you can afford.
Student Loan Forgiveness Plans
Some repayment plans offer student loan forgiveness, but other federal programs offer forgiveness faster. You won’t find forgiveness plans like these in the private sector.
Public Service Loan Forgiveness: If you plan to work in the public sector or for a non-profit, federal loans are your best bet. Under this program, you could have your loan forgiven after 10 years of service and 120 consecutive, qualifying payments. You’d also need to enroll in an income-based repayment program. For this program, who you work for matters more than what you do. You could be a non-profit CEO or a typist for the state government.
Teacher Loan Forgiveness: Planning to teach? Eligible educators can have $5,000 to $17,500 of their eligible Direct Subsidized and Direct Unsubsidized loans forgiven. You’d also remain eligible for the PSLF program. At the very least, you would have to teach full-time for five consecutive years in a low-income school to apply for this program.
Military College Loan Repayment Program: If you think you might join the military, federal student loans are a great option. The CLRP repays a specified amount of eligible college loans—private loans aren’t eligible—for new military personnel. The maximum repayment is $65,000, but your specific offer would depend on which branch you join and your service length.
Total Permanent Disability Discharge: This forgiveness plan isn’t something you plan on needing, but it’s still nice to know it’s there. Individuals who can prove they’re totally and permanently disabled are eligible for immediate student loan discharge. You’ll need documentation from the Veterans Affairs Office, the Social Security Office, or your physician. Forgiven loans are not considered taxable income.
A Breakdown of Private Student Loans
Private student loans are loans you secure on your own from a commercial lender. They help fill the gap between your financial aid and what’s actually due. You can use them to cover tuition, room and board, books and supplies, and other related educational expenses.
Where Do Private Student Loans Come From?
The most popular private student loan lenders are banks, credit unions, and online lenders specializing in student loans. Some state agencies and colleges offer private loans directly to students too.
How Do I Get a Private Student Loan?
You’ll need to apply online or in-person to one of the places listed above. Start with your current bank or a local credit union. Some banks offer lowered interest rates for existing customers and credit unions tend to offer some of the lowest interest rates around. Search around online and you’ll find lots of potential lenders. Some popular options are Sallie Mae and College Ave Student Loans. Check out our article on the best student loans for more ideas.
Every lender has different policies and evaluates potential borrowers differently, so apply to a few different places to see what offers you get. Get an offer that you like? You’ll need to accept it and sign a promissory note. This is a binding contract that lays out the terms and conditions of your loan and your agreement to pay it off.
What are the Interest Rates on Private Student Loans?
Unlike federal student loan interest rates, private student loan interest rates are awarded based on the borrower’s level of risk. You need an excellent credit score or a cosigner with excellent credit to secure the lowest interest rates. If you can do this, your interest rate could be as low as 4.07%, which is lower than any federal loan. That’s not the norm, however.
Most students who take out private loans end up paying higher interest rates. Private student loan interest rates generally range from 4% to 12%. This means that while it is possible to pay less interest on a private loan than on a federal loan, it’s nowhere near a guarantee. You’ll have a little more luck finding a good deal if you’re a graduate student or parent. That’s mainly just because the interest rates for Federal PLUS loans and Direct Unsubsidized loans for graduate students start out much higher.
Variable vs. Fixed Interest
Federal student loans offer fixed interest rates, but private lenders offer variable or fixed. While a variable rate might seem enticing, it’s a safe bet that the rate while change over the life of the loan—likely in the upward direction. If you think you’ll be able to pay off your loan quickly, a variable interest rate could make sense for you. Fixed interest rates stay the same throughout the life of the loan. They’re usually higher than a variable interest rate, but they won’t change. This can make planning for future loan payments less stressful.
Can I Refinance Private Student Loans?
Yes. You can refinance your private student loans through a private refinancing company. Refinancing your student loans involves another lender “buying up” your debt from your old lender and then becoming your new lender. Refinancing is a great way to save money or to make monthly payments more manageable. Your refinanced loan could have a lower interest rate or a new loan term. Remember, refinancing only makes sense if it benefits you in some way.
What Else Should I Know about Private Student Loans?
Private lenders aren’t required to offer you a grace period. Some still do. Of those that do, the grace period typically lasts for six months beginning at your time of graduation. Graduate in May? Your first payment will be due in November. Some lenders also offer grace periods to students who drop out or fall below half-time enrollment.
Remember, private student loan interest accumulates while you’re in school and continues to do so during your grace period. Making interest-only payments during your grace period can save you a lot of money.
Loan Repayment Term
Private student loan terms vary greatly. Most are in the five- to 20-year range. Shorter loan terms mean higher monthly payments, so they aren’t ideal if you’re required to start making payments while you’re still a student. Longer loan terms do make monthly payments more manageable, but you’d end up paying a lot of interest.
Private student loans aren’t eligible for Public Service Loan forgiveness, teacher loan forgiveness, the military college loan repayment program, death and disability discharge, or the forgiveness associated with federal income-driven repayment plans. Only in extreme circumstances like death or disability will some private lenders forgive your private student loans.
Which Should I Take Out?: Private vs. Federal Student Loans
There’s no one-size-fits-all student loan solution. What works for you might not work for your roommate and vice versa. But, in general, federal student loans are a safer bet. They have a generous grace period, multiple repayment plans available, and no cosigner requirement. That’s why most students exhaust their federal student loan options before even considering a private loan. Plus, if you qualify for direct subsidized loans, the government pays your interest while you’re in school. You won’t find “free money” like that anywhere else.
Private loans only make sense if you have excellent credit or a cosigner with excellent credit. In either case, you’d likely get a lower interest rate than what the federal government offers. However, a low-interest rate isn’t everything. You also need to think about your future income potential and whether you’d be able to afford the monthly payment. You won’t have repayment plans or forgiveness programs to fall back on.
If you go with private loans, pay close attention to the details of a private loan before signing the agreement. Ask the lender about repayment plans, grace periods, cosigner release, and when payments begin. The terms will look a lot different than your federal student loan terms.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.