Private student loan vs. federal student loan

Student loan application form on desk with stationery

Learn the ways in which federal and private student loans vary from each other.

While all loans may seem the same, there are two main types of loans you can apply for: private student loans and federal student loans.

When starting your loan applications, the first step is to apply for federal student loans, via the FAFSA form. The FAFSA is designed for every single college family to apply for federal aid. After filling out the FAFSA form, your student should receive a copy of the Student Aid Report (SAR) within a couple weeks, which is a summary of the information you and your student provided in the FAFSA form. Colleges will use the information in your SAR to determine how much aid your student is eligible to receive and to create their financial aid award package.

But there are situations where your financial aid package may not be enough. In that case, you may want to look at private student loans.

The fundamental difference between the two is that the federal government underwrites federal student loans. Lenders and financial institutions, like banks or credit unions, offer private student loans. But, there are many more ways in which federal and private student loans vary from each other.

Here’s an easy way to compare the differences between each:

Federal loans Private loans
How to apply You complete the Free Application for Federal Student Aid (FAFSA) to qualify for any federal student loan. You will use the federal loan estimate as your first step in applying for a private loan. Those award letters will help you determine how much you may need to apply to borrow for a private loan. You apply through the bank (or lender) directly.
How to use your funds Generally, federal loans help pay college costs only, and you may be limited to how much you can borrow. You have more discretion when it comes to how much you can borrow and what you can use your borrowed funds for.1
Interest rates: Fixed or variable Federal student loans always offer fixed interest rates. Some private student loans offer fixed rates while others come with variable rates.
Paying for interest while in school Some — but not all — federal loans are subsidized, meaning the interest on the loan is paid by the government while you’re still in school. You’re solely responsible for paying the interest rate on private loans.
When do payments start? You don’t have to make payments on federal loans until you graduate, leave school, or change your enrollment status to less than part-time. You may be able to delay payments if you’re eligible for deferment. You may need to start making payments on your loans before you graduate. It varies by lender, but most students won’t need to make payments until they graduate or leave school.
Prepayment penalties Federal student loans do not have prepayment penalties. Depending on your lender, your loan may come with prepayment penalty fees. This means there’s a fee if you pay your loan off early. Be sure to consult with your lender about terms before applying for a loan.


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