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Last updated November 25, 2023

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Federal vs. Private Student Loans: What You Need to Know

Key Takeaway

Federal student loans offer lower interest rates, flexible repayment terms, and potential loan forgiveness, making them the better option. Approach private loans with extreme caution.

We hear the term “student loans” all the time.

But did you know that there are lots of different types of student loans?

Some student loans are federal. That means that they’re awarded by the federal government. Other loans are private, which means that they come from private lenders.

In this post, I’ll guide you through what the differences are and why you should choose federal loans over private ones.

What's the Difference Between Federal and Private Loans?

Federal student loans are a type of financial aid. As the name implies, they are funded by the federal government. This category includes subsidized and unsubsidized loans, and you apply for them through the Free Application for Federal Student Aid (FAFSA).

The federal government also offers Parent Plus Loans—a larger loan that parents can use to fill the gap between the cost of their child’s education and what they can pay out of pocket.

On the other hand, private student loans are nonfederal loans offered by private entities like banks, credit unions, state agencies, and schools. Unlike federal loans, you don’t access private loans through the FAFSA. You apply for them directly through whatever lender you’re borrowing from. 

However, the main differences between these two loan types are their interest rates, repayment conditions, and flexibility.

Federal Loans

Federal loans tend to be much more flexible than private loans. They have:

  • relatively low, fixed interest rates
  • more flexible payment terms
  • the potential for loan forgiveness through programs like PSLF

Having lower interest rates, flexible repayment terms, and the possibility of forgiveness makes federal student loans a lot more manageable.

Private Loans

Private loans are almost always less affordable because they tend to have:

  • higher (sometimes variable) interest rates
  • requirements for credit checks
  • less flexible repayment terms
  • fewer restructuring options
  • no loan forgiveness programs

Because of these terms, private loans are usually much less flexible, which makes them a lot harder to repay. When you hear about people with tens of thousands in student loan debt that keeps growing in spite of their payments, there’s a good chance they have private loans.

Should You Take Out Private Loans?

We strongly suggest you avoid private loans if you can.

Because of the cost of college, there may be no choice but to take out student loans to help you finance your education. In fact, if you can’t pay for college out of pocket and don’t receive a full-ride scholarship, then you probably will have to take out loans.

But if you’re going to take out loans, you should always take out federal loans over private loans. As we’ve seen, federal loans are much more flexible and forgiving, which means that they’re less likely to bury you in student loan debt.

Private loans may seem like a good option in the moment because they can help you cover more costs, but they usually end up costing you more in the long run.

You may run into a problem, though.

Through the FAFSA, you might only qualify for a certain amount in federal student loans. That amount may not cover everything you need to pay for college.

At that point, you’ve got two options:

  1. Ask your parent or guardian to take out a federal Parent PLUS loan, which has most of the flexibility of other federal loans but allows you to take out a greater amount, or

  2. Find a cheaper college.

Yes, you should approach private loans with that much caution. If you will need to take out private loans to cover your tuition and expenses, then you should reconsider your options. You can still get a great education, even if you attend a more affordable college.

To avoid ending up in a no-win situation, always make sure that you’ve built a smart and balanced college list with options you can afford. If you’re past the traditional application due dates and still need more options, look into schools with rolling admissions or even consider a gap year.

But overall, by prioritizing federal loans and seeing private loans as a last-ditch option, you can avoid being burdened with high-interest debt later on.


Understanding student loans can be complicated, but knowing the key differences between federal and private loans can guide your decisions. Federal loans offer lower fixed interest rates, more flexible repayment options, and are easier to access than private loans, which come with higher rates and less forgiving terms. Prioritize federal loans, and treat private loans with caution. If you're contemplating private loans, it might be time to investigate more affordable colleges.

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