Understanding Federal & Private Student Loans
August 4, 2025
Navigating the world of student loans can feel overwhelming, especially for first-time students and borrowers. With a realm of options available, it’s important to understand the nuances between the different loan types and how each option can potentially affect your financial future. Whether you’re a first-time borrower or need a refresher course before furthering your education, we’ll help break down some of these key differences between the main types of student loans: federal and private. By understanding each loan type’s features, benefits, and drawbacks, you can make more informed decisions supporting your higher education goals.
Student Loans 101
College students can pursue two types of loans: federal student loans and private student loans. The primary difference between the two is that the federal government provides federal loans, and private companies, including banks, credit unions, and other financial institutions, provide private loans.
Whichever loan structure you choose, it’s important to understand the essentials. Both are loans that you must repay, plus interest. Both loan types are legal contracts you agree to, so it’s imperative to understand what you are signing. If anything is unclear to you, ask a parent or guardian, your lender, or an advisor at your school.
Federal Student Loans
We’ll get into more specific details to compare the two loan types below, including interest rates and repayment options. However, let’s start with some key details that set federal loans apart.
For starters, borrowers are not required to undergo a credit check. Additionally, subsidized loans are available and awarded to borrowers based on financial need. Your financial need is determined according to your FAFSA (Free Application for Federal Student Aid). This application is required for most scholarships, grants, loans, and other types of financial aid.
Some loan options offer income-based repayment plans, wherein your repayment rate is determined based on your salary upon completing your degree and obtaining a job. Federal loans also allow borrowers to adjust their repayment plan even after taking out the loan.
Private Student Loans
Private student loans can help pay for college after you’ve explored federal student loans, scholarships, and grants. Unlike federal loans, private loans do require a credit check. However, private loans can
provide greater availability since a cosigner (such as a parent) can be added to the loan to help improve the chances for approval.
Private student loans typically offer the choice between a fixed or variable interest rate, which affects your monthly payment.
- Fixed interest rates remain the same throughout the entire loan term, providing predictable monthly payments for consistent budgeting.
- Variable interest rates may increase or decrease based on the loan’s index and the economy. Consequently, your monthly payments may fluctuate, which could result in lower costs for a period.
Private loans also offer different repayment options, including paying interest-only or fixed payments while enrolled in school. Paying back part of your loans while still in school can help lower your overall student loan cost and shorten the time required to repay your debt.
Key Differences Between Federal & Private Student Loans
The following chart provides a quick glimpse into the general differences between federal and private student loans – allowing you to make a more informed decision regarding your financing options.
| Federal Student Loans | Private Student Loans | |
| Interest rates | Interest rates are fixed and often lower than private loans. | Rates may be variable or fixed, and higher or lower than federal loans. |
| Subsidies | You may qualify for subsidized loans, in which the government pays at least a portion of the interest while in school. | Most private loans are unsubsidized, so you will be responsible for all interest. |
| FAFSA® is required to apply | Yes | No |
| FAFSA® determines borrowing limit | Yes | No |
| Borrowers apply through a lender, like a bank or credit union | No | Yes |
| A credit check is required | No | Yes, most private loans require an established credit history. |
| Can have cosigners to increase approval odds | No | Yes. If you do not have a strong credit history, you can have a cosigner to help improve your chances of approval. |
| Repayment plan can change after borrowing | Yes, federal loans allow changes to the repayment plan after you have borrowed the loan funds. | Check with your lender to determine if your repayment plan can be changed. |
| Prepayment penalties | There are no penalties for paying the loan off early. | Check with your lender to determine if prepayment penalties apply. |
| Loan forgiveness options | You may be eligible to have a portion of your loans forgiven if you qualify for the Public Service Loan Forgiveness (PSLF) program. | Loan forgiveness is typically unavailable for private loans, except in extreme circumstances like death or total disability. |
How to Choose Which Loan is Right for You
It’s typically optimal to exhaust your federal loan options first, as more limited funding is available for these loan types. Federal loans offer more protection and benefits based on your income level and can be helpful if you face financial difficulties down the road.
Private student loans are an excellent option for securing additional funding for your education. If you have a solid credit standing and can secure a lower interest rate, private lending can go a long way.
Ultimately, deciding which option or combination best suits your unique needs and circumstances is up to you. The information provided can help you form a framework for identifying which options are best for you.
Additional Borrowing Options to Consider
While federal and private student loans are the primary source of financing higher education, they are not the only options. Depending on your specific needs, other avenues might provide lower-rate opportunities and more flexibility, such as:
- Personal Loans:
Student loans are long-term loans that can cause you to pay a significant amount of interest over the years. You can use student loans for the bulk of your school costs and a lower-rate personal loan to cover other expenses, such as living costs, organization dues, etc.
Personal loans generally have fixed rates and set repayment terms, helping you to repay the debt faster and with less interest than traditional credit cards.
- Home Equity Line of Credit (HELOC):
If your parents are homeowners and plan to help cover a portion of your education costs, a home equity line of credit is a common tool used to keep costs low. These longer-term, secured loans offer low rates and the ultimate flexibility in borrowing money whenever it’s needed.
We’re Here to Help!
Deciding between federal or private student loans or a combination of both requires careful consideration of your financial circumstances and long-term goals. By understanding the key differences and exploring all your options, you can feel confident that you are making an informed decision that will serve as the foundation of your educational journey.
If you want to learn more about higher education financing or wish to explore accounts for young adults, we’re happy to help. Please stop by any of our convenient branch locations or call 888-777-9982 to speak with a team member today.
Each individual’s financial situation is unique, and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
Disclosures
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This credit union is federally insured by the National Credit Union Administration.
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