A Lesson on Federal Student Loans vs. Private Loans

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When it comes to covering the ever-increasing costs of college, it can get a bit confusing. There are several options to help with the expenses, the most common being federal student loans and private student loans. There are advantages and disadvantages to each of these choices, so how does one know which route to go? Let’s start with an overview of both.

Federal Student Loans and Private Student Loans

There is a lot to consider when you are trying to choose between federal student loans and private ones. Each comes with its own ups and downs.

However, when compared carefully, there is a logical route to take when trying to cover the costs of college:

1. Fill Out the FAFSA

Even if you do not believe you will qualify for anything, it is worth trying. You just might find yourself completely surprised. And even if you do not qualify for subsidized loans, you still need to fill out the FAFSA for potential unsubsidized loans. You will not know what is available until you do.

2. Grants and Scholarships

Apply for as many grants as you can. If you qualify for the Pell Grant, the Student Aid Report generated by your FAFSA will inform your school of that. Also, if you are a minority, have a special interest, or a special skill, look into potential scholarships. For more information on grants and scholarships, talk to your financial aid advisor or a high school counselor, your religious group, and any organizations you or your family is a part of.

3. Subsidized

If you qualify for any subsidized loans, take them. You will not need to worry about any interest or payments while you are still in school.

4. Unsubsidized

Next, accept any unsubsidized loans that you qualify for. While you might- keyword here is might- get a higher loan amount and lower interest rate from a private loan, many experts agree that unsubsidized loans are still the best option. This is because, between those and private loans, unsubsidized loans are the only ones that offer several repayment options in case you hit financial trouble.

They might also be forgiven and you could consolidate them for a lower interest rate in the future. Even if you have several student loans, you can use the national student loan locator to track down all of your lenders. From there, you can calculate your total balance owed and consolidate them all into one payment, preferably with a lower interest rate and more favorable terms.

5. Other Sources

If you still need some help to cover college costs, consider ways you could make the money to cover them. Could you pick up a part-time job? Take on a work-study program? Have a giant yard sale? Get personal loans from family members? Income share agreement maybe? Do some odd jobs, like cleaning houses or babysitting? Is there a way to cut your college expenses, such as buying used textbooks or living with your parents instead of on campus? Is there a subject you could tutor others in? Get creative. Every $100 you can find on your own is $100 you do not have to borrow.

6. Private Student Loans

Only after you have exhausted all other options should you apply for private student loans. While they can be very helpful, they have too many potential downsides to be the first choice. Instead, they should be your last resort. Otherwise, you may find yourself struggling to make loan payments while you are in school.

Following this sequence of funding should help you obtain the best financial aid package that you can get. Every student’s situation is different, of course, and many students end up with a combination of many loan types. The key is to take advantage of the best loan options first and let the less desirable ones be a “just in case” option.

Understand what your loan will cost along with all additional fees so you can be realistic about paying it back. Let Loanry try to help you. Our partnerFiona brings you the best offers from different lenders.

How Federal Student Loans Work

Federal student loans come from the government- namely the U.S. Department of Education. In order to qualify for federal student loans, you start by filling out the FAFSA, or the Free Application for Federal Student Aid. The FAFSA asks questions based on your income and your parents’ income if you lived with them in the previous year.

Through the information it gathers, the government determines what- if anything- you might be able to pay out of pocket for college costs. This amount is called the Expected Family Contribution (EFC). Depending on your financial information, your EFC could be as low as $0.

Whatever your EFC, the school or schools you apply to will subtract that amount from their cost of attendance to determine how much aid you will need. They will then put together grants and federal student loans to cover your financial need. Some low-cost colleges, like community colleges, can be covered with a Pell Grant alone.

Others will need a combination of several aid types. If you can use only grants and scholarships, you are in good shape as those do not have to be repaid. Federal student loans do have to be repaid, so that needs to be taken into account when you are accepting an aid package.

If you are approved for grants and federal student loans, your aid is disbursed to your student account to pay for your tuition and other costs. If anything is left after paying the necessary costs, you can opt to have the rest either sent back to the loan provider or use it for other living expenses.

Federal student loans are a more popular option. In fact, of the approximate $1.5 trillion student debt, about $1.4 trillion in federal student loans while the rest is private student loans. Let’s take a look at why federal student loans are so popular and some of the disadvantages, too.

Advantages of Federal Student Loans

The several upsides to federal student loans are usually the deciding factors among students:

Does Not Rely on Your Credit

Federal student loans are based on your income and your need- not your credit. This makes them the best option for school loans for bad credit. Many students would not be able to attend school if their loans relied on their credit scores.

Repayment Options

When it comes time to repay your loans, there are several repayment options. These include IDRs or Income-Driven Repayment plans. Approval of an IDR means that your monthly payments are based on your income, and some low-income individuals even qualify for a $0 repayment plan for a set period of time.

While it likely will not last forever, it does give you the opportunity to get to a better financial state. IDRs are not the only repayment option, though. There are several programs that can help lower your monthly payments.

Potential Loan Forgiveness

In some cases, you can even get a portion or all of your student loans forgiven. Not everyone qualifies for student loan forgiveness, but it is a possibility- and it never hurts to try.


One of the great things about federal student loans is the interest. They generally come with a low, fixed interest rate. This means that no matter what other interest rates are doing, you will pay the same interest rate each month. The interest typically stays under 10 percent with some loans being as low as 3 percent.


Some federal student loans are what is known as subsidized. This means that while you are enrolled in school at least half time, the government pays your interest. You also have six months after graduation before the interest begins to accumulate, giving you time to start your career. During times of deferment of subsidized loans- times your payments are put on hold- you will not be charged interest, either.

Statistic: Number of recipients of federal student aid in the United States, by program in 2018/19 (in millions) | Statista

No Prepayment Penalty

While it is certainly not required for you to prepay any loans, you can do so without penalty when it comes to federal student loans. Many other loans, especially private loans, do penalize you for prepaying your loans. There are also federal programs through which you can refinance your loans.

Unsubsidized Loans

There are also unsubsidized loans that do not rely on your financial need. The difference is that the interest begins accruing as soon as the funds go to your school. However, that interest is still pretty low.

Disadvantages of Federal Student Loans

As great as federal student loans can be, they also have their downsides:

Lower Loan Limits

Federal student loans do come with loan limits as your aid is not allowed to surpass your financial need. Often, this can result in low loan amounts that do not cover all of the costs associated with college, leaving students to borrow from other sources.


To remain eligible for grants and federal student loans, you must recertify every year by completing a new FAFSA. Granted, this is a small price to pay for help to pay for school, but it can be an inconvenience. Also, if you miss the deadline to apply, you may have to put off classes for a time.

Rules on Use

While there are federal student loans that can cover the full cost of attendance, there may be limits on what you can use the loans for exactly. If this is the case with your particular loans, it will be in the agreements you sign or you can ask your financial aid office for information.

How Private Student Loans Work

Private student loans, on the other hand, come from private sources. These include banks and credit unions, individuals, sometimes companies and corporations, and other private lenders. The application process is a bit different from federal student loans since private student loans are based on credit and financial resources. If your credit is not in good shape, you will likely need a co-signer.

Federal and Private student loan features

You can apply on your own through different banks and online lenders. However, your school may be able to help. When I was getting my loan package and needed extra funds, it was my school’s financial aid office that found me a private loan. They also acted as the go-between to get all contracts signed. If you need a private loan, ask your financial aid advisor if he or she has any information on where you should apply.

If you are approved for the loan, you can use it toward any education expenses you choose. The funds are typically sent directly to your school. With some private school loans, you can have any remainder left after those expenses sent to you for living expenses. With other private loans, they will be for the exact amount you need so there will be none left over.

Advantages of Private Student Loans

Private student loans may be a less desirable option, but they do have some benefits:

Higher Loan Limits

As private student loans are based on credit instead of need, you may qualify for higher loan amounts than you can receive through federal student loans. Additionally, with a high enough credit score, you might qualify for a lower interest rate than with federal student loans.

Not Need-Based

Private student loans are not based on need, meaning that anyone has the potential to receive them. This opens the doors to those who may not have such a high need but also cannot afford to pay for school upfront.

Great Supplemental Source

Sometimes – depending on your particular school and degree program – you will not be able to receive enough grants and federal student loans to cover the full cost. And if you have to retake a class or even decide to switch majors mid-program, you may not have enough federal aid to take care of it. This is where private student loans really shine. They are a great supplement to other types of aid.

Disadvantages of Private Student Loans

For many people, the disadvantages of private student loans far outweigh the benefits:

Variable Interest

Private student loans often come with variable interest rates. This means that your interest rate will fluctuate according to external factors. Every month, the amount of your payment that applies to the principal might change, making it more difficult to know when you will have the loan repaid.

No Subsidized Loans

Unfortunately, private student loans generally do not offer any type of grace period. The interest begins accruing immediately. In addition to that, almost all private loans require you to begin making payments while you are still in school. If you hit a financial roadblock, you cannot have your loan payments deferred like you can with federal student loans. Your lender expects their payment on time every month, regardless of your situation. This is not to say that a private lender will not work with you, but it is not something you should count on.

Less Payment Flexibility

While we are on the subject of paying your loans, private student loans offer much less flexibility than federal student loans. We already pointed out that deferment is not likely, but it does not stop there. Private student loans do not offer repayment programs based on your income. You are tied to the payment that you signed on for.

Relies on Credit Score

As stated previously, private student loans are not based on need but on credit and the ability to repay. While that can be good for some people, there are still many that do not have the credit score that they need. This leaves a gap in the middle- the students that do not qualify for enough federal aid yet do not have the credit they need to be privately funded.

Try to make your payments on time every month. In this way, you will boost your credit score. Keep in mind that your payment history can impact your credit score later.

No Loan Forgiveness

With federal student loans, there is at least the possibility of loan forgiveness. With private student loans, that is not the case. You will have to repay those loans, regardless of your situation or any other qualifications that might allow your federal loans to be forgiven.


Making wise choices when it comes to funding your college education is imperative to your financial future. With people in their 90s still owing student loans, choosing between the various options can be scary. No one wants to still be in college debt all of their life.

As such, it is important that each and every student carefully consider their options. We hope that this overview has given you some clarity on which direction you should take. As always, if you need additional information, consider consulting a financial advisor.