Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
There are a few different options when it comes to financing a college education, and it’s important to understand the pros and cons of each. Then, you’ll likely be better able to develop a funding strategy that fits your unique situation.
Depending on your academic qualifications, you may have been awarded scholarships or grants, which is funding that won’t (typically) need to be repaid. Any expenses not covered by a scholarship will need to be financed, often through a combination of work-study, personal funds, or student loans.
It is fairly common for college students to take out student loans to finance their education. There are two main types of student loans — private student loans and federal ones. We’ll compare and contrast some of the more popular features of both private and federal student loans and explore some features that can help you determine what makes the most sense for your financial situation.
Recommended: How Do Student Loans Work? Guide to Student Loans
Federal Student Loans
Federal student loans are funded by the federal government and, in order to qualify, you must fill out the Free Application for Federal Student Aid (FAFSA®) every year that you want to receive federal student loans. We’ll delve more into FAFSA soon — but first, here are some important distinctions to consider.
Subsidized vs Unsubsidized Loans
Federal loans can be subsidized or unsubsidized. If you’re an undergraduate student and you have a certain level of financial need, you may qualify for a subsidized loan. The amount of money you qualify for will be determined by your school . They’ll also determine how much money you should receive in subsidized loans, if any.
If you are granted a subsidized loan, the U.S. government will cover, or subsidize, the cost of accrued interest on the loan while you are a full- or half-time student. Your interest payments are also covered with subsidized loans during the six-month grace period after graduation as well as during any periods of loan deferment.
If you receive unsubsidized federal loans, you will not need to demonstrate financial need when applying and, as with subsidized loans, your school will determine the amount you can receive, based on what it will cost you to attend. But with unsubsidized loans, you are responsible for the principal amount of the loan as well as any interest that accrues throughout the life of the loan.
Direct PLUS Loans for Parents and Graduate Students
Direct PLUS Loans are another source of federal student loan funding. To qualify for graduate PLUS Loans, you need to be a graduate-level or professional student in a program that offers graduate or professional degrees or certifications and be attending college at least half-time.
Or, parents can also apply for a Parent PLUS loan if they’re the parent of a dependent undergraduate student attending an eligible school at least half-time. “Parent” can be defined as biological or adoptive — or, under certain circumstances, you can be a step-parent.
To obtain a Direct PLUS loan, you cannot have an adverse credit history (you can learn more about that here ). Plus, you (and, if applicable, your dependent child) must meet the general eligibility requirements for federal student aid.
Recommended: The Differences in Direct vs. Indirect Student Loans
More About the FAFSA
If you plan to apply for any of these types of federal loans, you’ll need to fill out the FAFSA form. Be aware of your state’s FAFSA deadline — FAFSA funding is determined on a rolling basis, so the sooner you can apply, the sooner you may qualify.
Benefits of Federal Student Loans
First off, you won’t be responsible for making student loan payments while you are actively enrolled in school. Your repayment will typically begin after you graduate, leave school, or are enrolled less than half-time. Interest rates on federal student loans made after July 1, 2006 are fixed and are typically lower than interest rates on private student loans.
And depending on the type of federal loans you have, the interest you pay could be tax-deductible. Aside from Direct PLUS Loans, credit history doesn’t factor into a federal loan application. When it comes to federal student loan repayment, there are several options to choose from, including several income-driven repayment plans.
And if you run into difficulty repaying your federal student loans after graduation or when you drop below half-time enrollment, there are deferment and forbearance options available. These programs allow qualifying borrowers to temporarily pause payments on their loans should they run into financial issues — but interest may still accrue. The loan type will inform whether a borrower qualifies for deferment or forbearance.
Borrowers can contact their student loan servicer for more information on these programs.
Qualifying borrowers can also enroll in certain forgiveness programs, such as Public Service Loan Forgiveness (PSLF). These programs have strict requirements, so borrowers who are pursuing forgiveness should review program details closely.
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Federal Student Loans Pros and Cons
Here is a recap of some of the pros and cons of federal student loans.
| Pros | Cons |
|---|---|
| Aside from PLUS Loans, borrowing a federal student does not require a credit check. | Federal borrowing limits may mean that students aren’t able to borrow enough funds to pay for college. |
| Undergraduate students may be eligible to borrow Direct Subsidized student loans. The borrower isn’t responsible for paying interest that accrues on subsidized loans while they are enrolled at-least half time, during the grace period, and during qualifying periods of deferment or forbearance. | There is a borrowing limit on Direct Subsidized student loans and not all students will qualify for subsidized loans, since they are need-based. |
| There are deferment and forbearance options if borrowers run into financial difficulty during repayment. | Depending on the type of loan interest may accrue during periods of deferment or forbearance. | Borrowers have access to federal repayment plans, including income-driven repayment plans. |
| Fixed interest rates that are generally lower than interest rates on private student loans. | |
| Borrowers have the option to pursue federal loan forgiveness through programs like Public Service Loan Forgiveness. |
The CARES Act and Federal Student Loans
The CARES Act, passed in March 2020 in response to COVID-19, includes provisions to help borrowers with federal student loan repayment. The bill temporarily pauses payments on most federal student loans and sets interest at 0%. Since the bill passed, the payment freeze has been extended several times by executive orders and is now in effect through May 1, 2022.
Additionally, the CARES Act suspends involuntary collections and negative credit reporting during the same time period.
While required payments are paused, borrowers are still able to make payments on their loans if they so choose. 100% of payments made during this time will be applied to the principal balance of the loan.
Borrowers enrolled in forgiveness programs will not be impacted by the nonpayment of their loans during this time. The Education Department will consider this time period as if the borrower had continued making payments.
Private Student Loans
Private student loans are not funded by the government. To apply for them, you can check with individual lenders (banks, credit unions, and the like), with the college or university you’ll be attending, or with state loan agencies.
Because these loans are available from multiple sources, each will come with its own terms and conditions. So, when applying for private student loans, it’s important to clearly understand annual percentage rates (APRs) and repayment terms before signing as well as the differences between private vs. federal student loans.
Since private student loans are not associated with the federal government, their repayment terms and benefits vary from lender to lender. Some private loans require payments while you’re still attending college. Unlike federal loans, interest rates could be fixed or variable. If you are applying for a variable-rate loan, it’s a good idea to check to see how often the interest rate can change, plus how much it can change each time, and what the maximum interest rate can be.
When applying for a private loan, the lender typically reviews your financial history and credit score, which means it may be beneficial to have a cosigner.
Again, be sure to ask your lender about repayment options in addition to any deferment or forbearance options.
These will all vary by lender, so it’s important to understand the terms of the particular loan you are applying for.
Private loans can help fill the monetary gap between what you’re able to cover with grants, scholarships, federal loans, and the like, and what you owe to attend college. It’s never a bad idea to take the time to do your research, shop around, and find the best loan options for your personal financial situation. For a full overview, take a look at SoFi’s private student loan guide.
Determining Whether a Student Loan Is Federal or Private
To find out if the student loan you have is a federal student loan, one option is to check the National Student Loan Data System (NSLDS). This database, run by the Department of Education, is a collection of information on student loans, aggregating data from information about student loans, from universities, federal loan programs, and more.
Borrowers with federal student loans can also log into My Federal Student Aid to find information about their student loan including the federal loan servicer.
Private student loans are administered by private companies. To confirm the information on a private student loan, one option is to look at your loan statements and contact your loan servicer.
Options for After Graduation: Consolidation vs Refinancing
After graduation, depending on one’s student loan situation, borrowers may wish to consider consolidation or refinancing options to combine their various loans into a single loan.
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What Is Student Loan Consolidation?
The federal government offers the Direct Consolidation Loan program that allows borrowers to combine all of their federal loans into one consolidated loan.
Loans consolidated in this program receive a new interest rate that is the weighted average of the interest rates of all loans being consolidated — rounded up to the nearest one-eighth of a percent. This means that the actual interest rate isn’t necessarily reduced when consolidated. If monthly payments are reduced, it is most likely because the repayment term has been lengthened. Additionally, only federal student loans are eligible for consolidation in the Direct Consolidation Loan program.
What Is Student Loan Refinancing?
Borrowers with private student loans might consider refinancing their loans. Essentially, refinancing is taking out a new loan. Depending upon individual financial situations, applicants could qualify for a lower interest rate through refinancing.
When an individual applies to refinance with a private lender, there is typically a credit check of some kind. Each lender reviews specific borrower criteria, which varies from lender to lender, which influences the rate and terms an applicant may qualify for.
Recommended: The SoFi Guide to Student Loan Refinancing
But what if you have both federal and private loans? If you combine your federal loans through the Direct Consolidation Loan program and refinanced your private loans, you’d still have two payments. SoFi can refinance federal and private student loans together to give you one convenient payment. It’s important to note, however, that the benefits and protections offered with federal student loans don’t transfer when loans are refinanced by private lenders, so keep that in mind.
To get a sense of how refinancing might impact your student loans, take a look at this student loan refinancing calculator.
Refinanced Student Loans Pros and Cons
Refinancing student loans can have pros and cons. This table details a few to consider.
| Pros | Cons |
|---|---|
| Potential to secure a more competitive interest rate depending on factors like borrower’s credit score and income history. This could result in a substantial reduction of accrued interest over the life of the loan. | Not all borrowers will qualify to refinance or be approved for a lower interest rate than on their existing loans. |
| Potential borrowers can apply with a cosigner to potentially secure a more competitive interest rate. | Interest rate and loan terms are set by the lender and are based on factors including the applicant’s credit history. |
| Refinancing allows you to have a single monthly payment with the lender of your choice. | Refinancing any federal loans eliminates them from borrower protections, including deferment options, income-driven repayment plans, or the option to pursue Public Service Loan Forgiveness. |
| The loan term can be adjusted — either shortened or extended — when student loans are refinanced. | Extending your loan term will generally result in lower monthly payments, but will typically result in increased interest costs over the life of the loan. |
Can You Refinance a Private Student Loan to a Federal One?
It’s not possible to refinance private student loans into federal loans. Because private student loans are made directly with private lenders, not the federal government, it is not possible to refinance them into federal student loans.
Combining Federal and Private Student Loans
Refinancing federal loans with a private lender is the only option that allows borrowers to combine both federal and private student loans into a single loan. While refinancing may allow borrowers to secure a competitive interest rate or preferable terms, it’s very important to understand that when you refinance federal student loans, they no longer qualify for federal benefits or borrower protections.
Refinancing may make sense for federal student loan holders who do not plan to take advantage of any federal programs or payment plans, but it won’t make sense for everyone. When you are evaluating whether you should refinance student loan debt reflect realistically on your professional and financial situation. For example, borrowers who are enrolled in income-driven repayment plans or are pursuing Public Service Loan Forgiveness, may find that refinancing their federal student loans doesn’t make sense for their personal goals.
The Takeaway
Refinancing won’t be the right choice for everyone. Again, refinancing federal loans eliminates them from the federal benefits and borrower protections — including the current CARES Act protections. Consulting with a financial professional could be helpful as you determine which repayment strategy fits best with your financial goals.
Those who are still interested in refinancing could consider SoFi, where there are no origination fees and no prepayment penalties. You can choose between a fixed or variable rate loan. And borrowers who unexpectedly lose their job could qualify for SoFi’s unemployment protection program, which allows the suspension of monthly payments for up to 12 months.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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