Federal vs. private student loans: Which should I choose?

Deciding between federal and private loans is a personal choice to make based on your individual circumstances. Federal student loans are the more popular option: They make up over 92% of all outstanding student debt, according to data from a June 2023 report by Enterval Analytics.

However, private student loans can still have a place in your college funding strategy, and many people take out a mix of both as each serves its own purpose.

Key differences: Federal vs. private student loans

Should I take out federal or private student loans?

• When to take out federal student loans: In most cases, it makes sense to exhaust eligibility for federal student loans first because they come with generous borrower benefits and protections that you can't get with private loans. However, federal student loans generally have lower borrowing limits (especially for undergraduates), so they might not cover all of your costs.
• When to take out private student loans: If you max out your federal funds, private loans can be a useful way to bridge the gap. Well-qualified borrowers may also find lower rates with private student loans in some cases. While federal interest rates aren’t based on your credit, rates on private student loans typically are. Those with a strong credit history may be rewarded with better rates on the private market. And if you don’t have a particularly strong credit background, you can often apply with a cosigner who does.

Compare student loan interest rates 

Federal student loan interest rates

Interest rates for federal student loans are the same for all borrowers who took out a loan within a specific time frame. Rates are set by Congress and they’re based on the 10-year Treasury note rate. Between July 1, 2023 to July 1, 2024, the interest rates are: 

Private student loan interest rates

Interest rates for private student loans vary by lender and depend on your financial profile, including your credit history, credit score, and income. Generally, opting for a shorter repayment term may also reduce your interest rate but will increase your monthly payments. Each lender determines what interest rate you can qualify for, and requirements can vary by lender. Compare private student loan interest rates from private lenders below. 

Related: Credit score for student loans

Federal student loans overview

Federal student loans are issued by the U.S. Department of Education. To determine your eligibility and the amount you can borrow, you must submit the Free Application for Federal Student Aid (FAFSA). You might be eligible for the following types of federal student loans depending on your family’s income, assets, and size: 

• Direct Subsidized Loans: Subsidized student loans are available for eligible undergraduate students in financial need, the Department of Education pays any interest that accrues while you’re in school, during periods of deferment, and during the grace period after you graduate.
• Direct Unsubsidized Loans: Undergrads can qualify for a Direct Unsubsidized Loan without proving financial need. However, you’re responsible for paying any interest that accrues for this loan. Graduate students can also take out Direct Unsubsidized Loans.
• Direct PLUS Loans: There are two types of these loans: PLUS loans for graduates and professional students and PLUS loans for parents. Unlike other federal options, Direct PLUS Loans require a credit check. However, those who have bad credit may still qualify for a loan.

Pros and cons of federal loans

Pros to consider

• The government may pay some of your interest: You don’t have to pay for accrued interest on subsidized loans while in school or during deferment. With private loans, you’re typically responsible for interest costs at all times.
• Federal loans may offer forgiveness: You may be able to get loans forgiven if you work in public service (through the PSLF program) or choose an income-driven repayment plan and make payments for a certain number of years.
• Federal loans are easier to qualify for: Your income and credit history don't matter when determining eligibility for most federal loans.
• You'll have a competitive, fixed interest rate: Your interest rate is determined based on the type of loan you borrow, not your credit or income. And your rate won't change over the life of the loan, since all federal loans have fixed interest rates.
• You have more repayment protections: You can change your repayment plan as needed, including switching to income-based plans, and you have many deferment and forbearance options.

Cons to consider

• Some federal loans are need-based: You have to show limited family income to be eligible for subsidized loans.
• There are borrowing limits for federal loans: Both lifetime and annual limits mean you may not be able to borrow enough to fully fund your education.
• Your educational status determines eligibility: Only undergrads are eligible for subsidized loans, and students in their freshman year typically have the lowest borrowing limits.
• Your interest rate may be higher than on some private loans: Depending on the loan, your interest rate could be higher than some private loans — especially if you have excellent credit.
• You have to pay an upfront fee: There's an origination fee for all federal student loans, but not for most private student loans.

Private student loans overview

If you’ve exhausted your options for grants, scholarships, and federal student loans, private student loans can help you access additional money to pay for college. Private student loans are issued by banks, credit unions, and financial institutions. They’re typically harder to access than federal student loans because eligibility depends on your credit score and income. 

Related: Best Private Student Loans of 2024

Pros and cons of private loans

Pros to consider

• You may be able to get a lower interest rate: Some private loans have lower starting rates than you would pay with federal loans, especially if you have great credit. A lower rate means smaller monthly payments and lower total interest costs over time.
• There are no upfront fees from most lenders: You typically don’t have to pay an origination fee with private loans, but this can vary by lender.
• You can borrow up to the cost of attendance: Many lenders allow you to borrow up to the school-certified cost of attendance. However, some lenders may set annual or lifetime borrowing limits.
• You have a choice of many lenders: You can shop around and compare rates and terms to find a private loan that's right for you.

Cons to consider

• You need good credit and proof of income (or a cosigner): Many borrowers — particularly younger students — may not have the income or credit to qualify for a private loan on their own. In that case, you may need to ask a loved one who has good credit and a higher income to cosign for the loan.
• There are limited borrower protections: Generally, you can’t change your private loan repayment plan after you borrow (unless you refinance your private student loans). Income-based payment plans are very rare in the private marketplace, and depending on the lender, you may have few options for deferment or forbearance.
• You won’t have your loans forgiven: While federal student loans offer several paths to forgiveness, that’s not offered by private lenders.
• Your payment can change over time: If you choose a variable-rate loan, your rate will move according to financial benchmarks. Depending on larger economic trends, you risk your rate and payment rising unexpectedly.

Related: Best Student Loans for Bad Credit in 2024