There are two types of student loans, federal and private. Federal student loans are offered by the federal government, while private student loans are offered by banks, credit unions, and online lenders.
Federal student loans, however, come with far more benefits than private student loans which is why it may be the best option for most students.
Applying for a Student Loan
Federal Student Loans
In order to apply for a federal student loan, you must fill out the Free Application for Federal Student Aid (FAFSA). This is the only application available to access federal student loans, federal grants, federal work-study, and it is also the application that institutions use for other financial aid they may be able to offer the student. The FAFSA is available on October 1st for the following school year, and it collects financial and family data to determine how much aid a student is eligible for.
Private Student Loans
There is no “one” application for private student loans, students who wish to take out student loans must apply directly with the lender of their choice. The lender will most likely look at credit score, credit history, income and other financial and personal information. If the student does not qualify alone, they may need to find a co-signor who is deemed responsible for paying back the loan in case the student (borrower) is unable to.
Interest Rates
When choosing which type of student loan you will apply for, it’s important to factor in the interest rate of the loan, since it adds to the overall cost of borrowing. Federal student loans generally have lower interest rates compared to private student loans, because they offer a low, fixed interest rate, regardless of your credit score or income. Which is why students with little to no credit history stand to benefit from low federal loan rates.
Federal Direct student loans first disbursed on or after July 1, 2025 and before July 1, 2026 have interest rates that start at 6.39% and as high as 8.94% for federal PLUS loans which are set by federal law. By contrast, private student loans may start as low as 2.99% and as high as 18%, depending on your credit history, and may also be variable or fixed interest.
Federal student loans also come with origination fees currently set at 1.057% - 4.228% of the loan amount, depending on when you take out the student loan and the type of federal loan you are obtaining. Private student loans may or may not charge an origination fee, however, those that do not often counteract the fee saving with higher interest rates.
Borrower Benefits
There are many consumer protections you will have as a federal student loan borrower that originate with your student loan. Private student loans, on the other hand, may offer similar benefits, but not always. It is important that you, as the consumer, shop around for best benefits with different lenders if you choose to take out private student loans.
Benefits associated with Federal Student Loans include:
Forbearance and Deferment: Up to three years if you experience an economic hardship.
Grace Period: Up to a six-month grace period before your loans go into repayment after you graduate, leave school, or drop below half-time enrollment
No interest accrual for certain loans: Federal Direct Subsidized loans do not accrue interest while the student is in school, during their grace period and while loans are in deferment.
Repayment options: Borrowers have different repayment options. Some repayment plans can help borrowers pay their balance down quicker, other repayment plans extend the lifetime of the loan, and other plans are available that lower monthly payments by taking into account the borrower’s income and family size. Learn of the different repayment plans.
Loan Forgiveness: Forgiveness options exist for borrowers in certain careers or in certain repayment plans. Other types of forgiveness, cancellations, and discharges exist for borrowers who were defrauded, borrowers who are total and permanently disabled, amongst other things. Learn more of forgiveness options.
Default delay: Federal student loan borrowers are given 270 days of nonpayment before loans go into default.
Credit Checks
Certain federal loans do not require a credit check; however, some do. Students can qualify for federal subsidized and unsubsidized loans without a credit check, but graduate students, and parents who wish to take out PLUS loans will have to undergo a credit check. If a borrower has adverse credit history, they may either sufficiently explain any credit issues or apply with a co-signer.
On the other hand, private lenders will perform a more extensive credit check on all applicants and they can either reject a borrower or charge a higher interest rates. Private lenders will take into account the credit score, credit history, income, cash flow, and other factors that must meet their standards. If a borrower does not qualify on their own, they may also require a co-signer.
Maximum Loan Limits
Federal student loans have a maximum amount that borrowers can borrow throughout college. The limited amounts range depending if the student is considered financially dependent on their parents or if they are financially independent which is determined based on the information in the students Free Application for Federal Student Aid (FAFSA).
Although these limitations may feel restrictive to borrowers who may need to borrow more, it also can help borrowers borrow only what they need, in return leading to more affordable monthly loan payments and responsible borrowing.
Federal PLUS loans offer higher limits, as parents or students can borrow up to the school’s cost of attendance. However, PLUS loans come with higher interest rates and origination fees. Although, it would be considerable to avoid them, if possible, PLUS loans can be a good alternative to private loans, which may have much higher interest rates. If you need additional money for school, it's best to shop around and choose the best option for you by considering the benefits and interest rates, plus other fees offered by the lenders.
Variable and Fixed Interest Rates
Federal loans offer fixed interest rates set by the federal government. Unlike federal loans, private student loans may offer either fixed or variable interest rates.
Fixed interest rates do not change during the life of the loan, unless the borrower refinances or consolidates their loan. (You can learn more about refinancing and consolidation in the section below). Meaning that the payment will remain constant throughout the life of the loan.
Variable interest rates, alternatively, may start lower than fixed interest rates, but can change or rise over time depending on the market interest rates. Fixed interest rates are safer in the long run, however, if you have a stable income with plans to pay off your student loan quickly, then it may be beneficial to choose a variable rate and pay down the loan when the rates are low, to avoid potential increases in the future.
Refinancing or Consolidation
Refinancing: Please keep in mind that federal loans can not be refinanced. If you choose to refinance a federal student loan, it will become a private student loan, and you will lose any benefits associated with federal loans, including repayments plans, forgiveness options, and other advantages. Student loan refinancing is only available through private companies. Refinancing is a good option for private student loan holders who have improved their credit score and have a more stable income. Borrowers have the chance to secure a lower interest rate by refinancing, which can in turn save the borrower a significant amount of money through the life of the loan.
Consolidation: Allows borrowers to combine multiple loans into one loan, which may lower the monthly payment and/or gain access to federal forgiveness programs. Consolidation can have many advantages and disadvantages which could impact your repayment goals. It’s important to understand both before consolidating. Learn more about consolidation.