Learn whether a federal or private student loan is better for your situation. Psst! It may be a combination of both.
Are you trying to decide between a public vs. private student loan?
If the cost of attending school is too much to afford on your own, college students, parents, and graduates can all take advantage of student loans for financial help.
Federal student loans and federal parent loans are provided by the U.S. government.
Private student loans are offered by lenders, banks, credit unions, schools, and other financial institutions.
You’ll need to pay back both types of loans (with interest) even if you stop attending classes or never graduate.
A majority of students start out with public student loans and then combine them with private loans to cover all their bases and education expenses.
The Benefits of Public Student Loans
Federal loans are issued and guaranteed by the U.S. Department of Education.
Your choices for public student loans include:
- Direct subsidized loans for undergraduate students looking for financial aid. These loans do not accrue interest while you’re still in school or during your grace period.
- Direct unsubsidized loans offered for both undergraduate and graduate students. These accrue interest while you’re in school and the total of that interest will be added to your balance when your grace period is over.
- Grad PLUS loans are earmarked for graduate and professional students. Unlike direct loans, you’ll need solid credit for approval.
- Parent PLUS loans help parents with undergraduate dependents borrow money to pay for education expenses. Parents will need stellar credit for these but they can also borrow as much as they need.
Public loans offer certain benefits private loans don’t usually provide. Here are a few upsides to Uncle Sam becoming your lender:
You may not need a credit check for approval
To apply for a public student loan, you’ll need to fill out an application form called the Free Application for Federal Student Aid (FAFSA).
The information you enter on the FAFSA will be used by the Department of Education to figure out how much of your education expenses you or your family can afford to pay. You will then be given a loan based on your specific amount of financial need.
Borrowers will only need to undergo a credit check for approval when they apply for a Grad PLUS or Parent PLUS loan.
Private student loans will almost always require a credit check (and decent credit) for approval.
You have a grace period after graduation to start payback
If you qualify for a subsidized loan, the government won’t charge interest on the money you borrowed while you’re enrolled at least half-time. You also won’t have to start making payments until your grace period ends.
Most federal student loans have a six-month grace period which begins after you graduate or drop below half-time enrollment.
You’re not obligated to make payments during this special window of time. But your loan will most likely accrue interest.
This time is supposed to be used to get your finances in order, find a job, and select the repayment plan you’re comfortable with.
Grace periods can change or extend based on circumstances such as:
- Getting called to active military duty
- Re-enrolling before your grace period ends
- Consolidating your public loans
PLUS loans do not have a grace period. They start repayment as soon as your loan money gets paid out.
Private loans are not subsidized either so you’re responsible for paying all the interest as soon as your payback date rolls around.
Income-driven repayment options
Certain federal loans offer an income-driven repayment option. This means your monthly payment amount will depend on your salary post-graduation.
If you’re not earning the big bucks right out of school, your monthly loan payments won’t be crazy expensive and unaffordable. They may go up once you land your dream job and a raise, however.
The ability to change your repayment plan
Most private lenders will not let you change your repayment plan after you take out a loan.
However, you may be allowed to change your repayment plan to better fit your financial needs with a federal loan. Certain public loans will even let you temporarily postpone your payments if you’re struggling financially.
Standardized interest rates
To keep public loans fair for all citizens, interest rates are the same for all borrowers.
This is the total opposite of private loans which base your interest rate on your credit and other factors relating to your financial health.
Public loans are also set at fixed interest rates, which means your interest will remain the same rather than rise and fall with the market like variable interest rates.
To top this all off, the fixed interest rate on public loans is often much lower than the interest rates on private loans.
No prepayment penalties
Many private loans will punish you with prepayment penalty fees for paying off your loan earlier than expected. But federal loans do not charge you for early repayment.
Loan forgiveness, loan cancellation, and discharge
Loan forgiveness, cancellation, and discharge mean you won’t have to repay some or all of your student loans due to special circumstances.
You may qualify for loan forgiveness or cancellation on federal loans if you’re studying for a public service job, start working in one, or become a teacher.
A loan discharge happens when you’re unable to make your payments, like if you become permanently disabled and can’t work.
Federal loans will also be discharged if the borrower passes away. This means no one will be held responsible to pay back the loan.
This is a stark contrast to private loans.
First, there’s typically no discharge option.
Second, many private student loans have a parent or guardian as a cosigner. If you (as the borrower) die or face permanent disability and cannot work, your cosigner will be on the hook to pay back your loan.
Moderate loan default consequences
If you stop making your monthly loan payments, you’ll be in default of your loan.
It takes 120 days of non-payment to be considered in default with a private loan. But public loan borrowers get 270 days of non-payment before they enter the default zone.
Additionally, the federal government can garnish your wages without a court order. But they can only legally take up to 15% of your disposable income to pay back your loan.
A private lender will need to win a court judgement against you if they want to garnish your wages. Unfortunately, they can also take as much as 25% of your income for payback, depending on the state.
All these benefits make it easy to see why everyone who needs assistance with their education expenses should try a public loan first.
Most borrowers need to supplement their federal loan with a private one.
The Benefits of Private Student Loans
Private student loans are loans not offered by the government. You’ll get them from lenders such as banks, credit unions, and other types of financial institutions.
The lender is responsible for setting all the terms, interest rates, and conditions on private loans since they’re funding them.
While more expensive than a loan issued by the government, they can help you cover expenses after you’ve used the money from your federal student loans (since they’re usually not enough).
Check out all the benefits of private student loans:
Anyone can take out a private student loan or cosign on one
Only students and parents of students can apply for public loans. And federal loans do not allow a cosigner to help.
But anyone can take out a private student loan and cosign on one.
This means parents, guardians, relatives, and other creditworthy people can help on behalf of the student, or even cosign on a private loan if the student doesn’t have the credit to qualify for one on their own.
Higher loan amounts
The information on your FAFSA determines your loan amount from the government. It does not take into consideration your cost of attendance (COA).
Because public loans are based solely on your financial needs, most are not enough to pay for all your education expenses — especially if you’re attending private school.
Private loans use COA and your credit history to set much higher loan amounts. So many students turn to private loans after they’ve tapped out their public loans.
Interest rates are set by the lender and reward those with good credit
Unlike the standard interest rate on public loans, private lenders set interest rates based on the borrower’s financial history and credit score.
This means if you or your cosigner have excellent credit, you may qualify for a lower interest rate with a private loan than the blanket interest rate everyone pays with public loans.
You choose the type of interest: fixed or variable
Federal loans use a fixed interest rate. Private loans let you decide whether you’d like a fixed or variable interest rate.
Go with a fixed rate if you like having predictable monthly payments. Variable interest rates change with the health of the market so you may have the chance to lower your payments depending on the economy.
Different loan repayment options to lower your total cost
Repayment on public loans typically doesn’t start until after you graduate or your grace period ends.
But some private loans will let you make low, fixed monthly payments or interest-only payments while you’re in school. Since you’ll be starting the repayment process sooner, you’ll pay less in interest, which will then lower the total cost of your student loan.
Ability to refinance for lower interest rates
If you refinance federal student loans, you lose many of their built-in benefits, such as loan forgiveness, income-driven repayment options, and other perks.
But you can refinance private student loans and:
- Consolidate all your student loan payments into one
- Qualify for a lower interest rate
- Pay less in interest fees over the life of your loan
So this means if you didn’t qualify for a low-interest rate the first time, you can still refinance for one later on.
Public vs. Private Student Loans: Which Is Right for You?
Since public loans have such incredible post-graduation repayment protections, it’s worth applying for one.
But you may still need a private loan to make up the difference between what your loan provides and your COA.
Go with a public student loan if:
- You’re the only one paying for your education and you don’t have the credit to qualify for a private loan without a cosigner.
- You qualify for financial need, or the difference between your COA and your expected family contribution (EFC).
- You’d like the flexibility to change your repayment plan.
- You like the borrower protections of income-driven repayment, grace periods, zero prepayment penalties, etc.
Go with a private student loan if:
- Your public loans are not enough to cover your COA.
- You’re attending a private school.
- You’d like a cosigner on your loan.
- You or a cosigner have excellent credit (you may score lower interest rates than certain public student loans!)
- You’d like the option to refinance your loan later on
When you have a better idea of which way you’re leaning, compare all your student loan options online to make sure you get the right one for you.
Compare Private Student Loans from Multiple Lenders Now
Only the Department of Education offers public loans. You’ll need to fill out your FAFSA to see how much financial aid you’ll receive for your enrollment expenses.
Once you find out how much assistance your public loan will provide, you’ll know how much more money you’ll need to source from private loans.
Since private lenders each use different criteria to approve student loans, you’ll want to compare options from multiple lenders to find the best fit for you.