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- Federal student loans and private student loans have different benefits and drawbacks.
- Generally, federal loans are a better deal as they offer more protections and lower fixed rates.
- However, federal loans come with origination fees, while most private lenders don't charge them.
You should always try to take advantage of free or lower-cost financial aid, like grants, scholarships, or work-study programs. But your aid package might not always come with enough money to cover the cost of college. That's where student loans come in.
Student loan debt has ballooned as educational expenses have continued to increase year over year, so if you're forced to decide between different types of loans, you're not alone.
There are two basic types of student loans: federal and private. Here are the differences, plus tips for choosing the best option for you.
Federal vs. private student loans
| Direct Subsidized Loan | Direct Unsubsidized Loan | Direct PLUS Loan | Private Loan | |
| Who can apply? | Undergraduate students | Undergraduate, graduate students | Parents of undergraduate students, graduate students | Undergraduate, graduate students, parents of undergraduate students |
| Financial need required? | Yes | No | No | No |
| Credit check required? | No | No | Yes | Yes |
| Cosigner needed? | No | No | Yes* | Yes |
| Interest accrue while in school? | No | Yes | Yes | Yes |
| Origination fees? | Yes | Yes | Yes | No |
| COVID-19 forbearance? | Yes | Yes | Yes | No |
*If you have an adverse credit history, you may need to find an "endorser," similar to a cosigner, to take out a loan.
Both federal and private loans are options to take out money that you'll later repay to cover the costs of school. With federal student loans, your lender is the government, while your lender is a private company with private student loans.
Here are the three types of federal student loans:
- Direct Subsidized Loans. These loans are available to undergraduate students who demonstrate financial need. The government will pay interest on your loans while you're in school at least half-time, for the first six months after you leave school, and during a period of deferment. Deferment is a temporary pause to your student loan payments for particular situations like active duty military service and re-enrollment in school.
- Direct Unsubsidized Loans. Undergraduate, graduate, and professional students can get these loans, though eligibility is not contingent on financial need. Interest will accrue on Direct Unsubsidized loans while you're in school, during your grace period, or period of deferment, but you won't have to pay this interest until your repayment period begins.
- Direct PLUS Loans. Graduate and professional students, as well as parents of undergraduate students, can take out these loans. Eligibility isn't based on financial need. You'll be required to pass a credit check and will need to meet additional requirements to qualify if you have an adverse credit history.
Federal student loans pros and cons
Private student loans pros and cons
How to apply for student loans
The government will require you to fill out the Free Application for Federal Student Aid, or FAFSA, to determine your eligibility for federal student loans. There is a federal deadline for aid each year, and many states and colleges also set deadlines for the aid they administer. You'll fill out this online form and will need to have the following information handy:
- Social Security number
- Your federal income tax returns, W-2s, and other records of money you've earned.
- Bank statements and investment records (if applicable)
- Records of untaxed income
- An FSA ID
- If you're not a US citizen, your alien registration number
Private lenders have different applications for aid that you can find on their websites. The information you'll need will vary by company, but you'll likely have to have similar documents verifying your identity and income. Private lenders will run a credit check to determine your eligibility for a loan, much like the federal government does with Direct PLUS Loans. Ask your specific lender for more details.
See Insider's picks for the best private student loans.
Both federal and private student loans can be good options if you're looking to find a way to pay for college, just keep in mind that federal loans often offer more favorable terms and protections than private loans.
Federal student loans frequently asked questions
Is it better to take out federal or private student loans?
Generally speaking, it's better to take out federal loans. They often have lower rates and better protections.
Are private student loan interest rates higher than federal student loan interest rates?
Private student loan interest rates are almost always higher than federal student loan rates, except occasionally for borrowers with great credit.