Private Student Loans vs Federal Student Loans
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.
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Federal Student Loans
Federal student loans are funded by the federal government. 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 in financial need, you may qualify for a subsidized loan. The amount of money you qualify for will be determined by your school.
With subsidized loans, the U.S. government covers the interest that accrues while you are a full- or half-time student, during a six-month grace period after graduation, and for any periods of loan deferment.
If you receive an unsubsidized federal loan, you don’t need to demonstrate financial need when applying. Interest begins accruing right away, from the day your loan is disbursed — though borrowers are not required to make payments until six months after graduation. As with subsidized loans, your school will determine the amount you can receive, based on your cost of attendance.
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 degrees or certifications and attend college at least half-time.
Parents can also apply for a Parent PLUS loan if their dependent undergraduate student attends an eligible school at least half-time. “Parent” is defined as biological, adoptive, or sometimes a stepparent.
To obtain a Direct PLUS loan, you cannot have an adverse credit history. Plus, you and 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.
Additionally, the application for the 2024-2025 school year won’t be available until December 2023. Usually, the new form launches every year on October 1. This means students will have less time to complete the form before the earlier state deadlines.
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.
Another perk is that your credit history doesn’t factor into a federal loan application. One exception is Direct PLUS Loans for grad students and parents.
Interest rates on federal student loans are fixed and typically lower than interest rates on private student loans. Depending on the type of federal loans you have, the interest you pay could be tax-deductible.
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 if you drop below half-time enrollment, deferment and forbearance options are 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 |
|---|---|
| Federal student loans do not require a credit check, except for PLUS Loans. | Federal borrowing limits may mean that students aren’t able to borrow enough funds to cover their entire cost of attendance. |
| Undergrads may apply for Direct Subsidized student loans. Interest does not accrue while students are enrolled at-least half time, during the grace period, and during qualifying periods of deferment or forbearance. | Not all students qualify for Direct Subsidized student loans, which are need-based. Borrowing limits also apply. |
| Deferment and forbearance options are available to borrowers who 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 are generally lower than interest rates on private student loans. | |
| Borrowers may 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, temporarily paused payments on most federal student loans and set interest at 0%. With the signing of the debt ceiling bill in June 2023, the three-year pause came to an end. Interest on federal student loans resumes on September 1, 2023, and the first post-pause payments will be due sometime after October 1. To ease the transition, borrowers won’t be reported as delinquent if they are late with payments through September 2024.
The CARES Act and the payment pause did not apply to private student loans.
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.
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.
Named a Best Student Loan Refinance Company
by U.S. News and World Report.
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
Federal student loans differ from private student loans in key ways. You must fill out the FAFSA every year to qualify for federal loans. With subsidized federal loans, interest doesn’t accrue until after graduation and a six month grace period. And federal loans offer special protections to borrowers, such as deferment and Public Service Loan Forgiveness. The same protections are not available on private student loans. You may or may not qualify for a lower interest rate on a private student loan, depending on your credit history, whereas your credit score doesn’t affect your ability to qualify for federal student loans.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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-criteria 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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