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Federal vs. Private Student Loans: Making Informed Borrowing Decisions

The road to higher education often intersects with the necessity of financial aid, and understanding the major differences of student loans can be a challenging task for many students and their families. We recognize the importance of making informed decisions when it comes to borrowing for college. In this blog, we’ll discuss the differences between federal and private student loans. Looking at everything from understanding the terms and interest rates, to exploring repayment options. Join us as we break down student loans, equipping students with the knowledge needed to make sound borrowing decisions and begin their academic journey.


Federal Student Loans

Federal student loans are educational loans available through the U.S. Department of Education. For each type of loan, the interest rate is the same for all borrowers (regardless of credit history) and comes with a variety of benefits that can make your repayment plan more affordable. Because of these benefits, many view them as the best form of financing to cover higher education costs for those that qualify.

There are a few main types of federal student loans:

  • Direct Subsidized Loans: are available for undergraduate students with financial need, and they cover all accrued interest while you’re in school and during deferment and grace periods.
  • Direct Unsubsidized Loans: do not cover your interest, and are available for both undergraduate and graduate students, regardless of financial need.
  • Direct PLUS Loans: are offered to graduate students and parents of dependent undergraduate students, and they’re the only type that doesn’t have a dollar-amount cap on how much you can borrow.

Some benefits to federal student loans include: 

  • Access to student loan forgiveness: Federal student loans offer access to loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. If you qualify for any of these programs, you could end up having tens of thousands of dollars in student loan debt forgiven once you meet the requirements.
  • Access to income-driven repayment plans: The Department of Education offers several income-driven repayment plans, which can reduce your monthly payment to as little as 10 percent of your discretionary income. If you struggle to make your monthly payments, these plans can be a huge lifesaver.
  • Few to no credit requirements: Most federal student loans don’t require a credit check at all. With Direct PLUS Loans, a credit check is used only to determine if you have certain negative items on your credit history, such as bankruptcy. If you haven’t had the chance to build a credit history, you will still qualify for federal loans.
  • Discharge in the event of loss or disability: If you become permanently disabled, your federal student loan balance is automatically discharged. Loan discharge also occurs in the event of the student’s or the parent’s death (if they took a parent PLUS loan).
  • Generally lower interest rate: For most students, federal student loans are likely cheaper in the long run than private student loans. The lower interest rates can mean paying thousands less over the life of the loan. This is especially true for undergraduate students who don’t have a stable source of income or a long credit history.

Though there are benefits to using federal loans, there are downsides as well:

  • Upfront fees: The federal government charges an upfront loans fee on all of its loan products. The fee is relatively low for undergraduate students but high for graduate and professional students, as well as for parents.
  • Loan limits: Undergraduate students are limited in how much they can borrow, which may require them to ultimately turn to private student loans to bridge the gap.
  • No choice of servicer: When you apply for federal student loans, the Department of Education assigns a loan servicer to you automatically. If you have a bad experience, you can consolidate your loans with another servicer, but the consolidation process can impact your access to certain benefits and protections.


Private Student Loans

Private student loans are educational loans offered by private lenders, such as banks and credit unions. Unlike many federal loan options, they require a credit check, and your approval and loan terms are dependent on your creditworthiness. It may be challenging for many students to get approved for private loans, but applying with a co-signer may improve the chances.

Although, in many cases, it’s best to start with federal student loans, there are some advantages to using private loans if necessary:

  • Higher loan amounts: Loan limits can vary from lender to lender, but you can generally get up to the total cost of attendance, giving you more borrowing power than with the federal government.
  • Chance for low interest rates: If you’re a graduate or professional student or a parent, it is possible to get a lower interest rate through a private lender than through the federal government if you have excellent credit – sometimes three or four percentage points lower than the federal rate. Starting rates can also be lower, meaning it can be a good option if you can pay the loan off quickly.
  • No upfront fees: Private lenders typically don’t charge upfront loan fees on private student loans, giving you savings right off the bat.
  • Loan terms are more flexible: The standard term for a federal student loan is 10 years, whereas private terms may be 5 to 20 years.

Before you take out a private student loan, you should consider some of the drawbacks:

  • Lack of protections: Private lenders do not offer student loan forgiveness programs and many of them do not offer income-driven repayment plans. You may be able to get on a forbearance plan if you end up struggling financially, but options for lowering your monthly payment on a permanent basis are scarce.
  • High interest rates for most: Because private loans require a credit check, people with no credit history or a low credit score may end up with a more expensive loan than what the federal government offers – and that’s if you qualify for a private loan in the first place.
  • Have to search for your own loans: You can apply for a federal student loan right through your school’s FAFSA application. However you are the one who must find private loans through lender websites.


Now that we know the differences, both pros and cons, between Federal and Private loans, how do you know which one is best for you? The truth is that it depends on your unique financial situation. Although Legacy doesn’t offer private student loans, we do offer personal loans and lifestyle loans for whatever life throws at you. To learn more about how you can save money as a college student, check out our blog Perks of Being a College Student.

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