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What is the difference between a Federal Student Loan and Private one and why you should care.

Federal vs Private Student Loans: 6 Core Ways They Differ » Student Loan Debt » Federal vs Private Student Loans: 6 Core Ways They Differ



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Taking out student loans is a daunting prospect, but so is facing today’s job market without a degree. A 2022 report from the National Center for Education Statistics (NCES) revealed that those with a college degree are still earning more and enjoying better job opportunities than those without.[1]

Unfortunately, education is still incredibly expensive. Student loans plague 70 percent of students who graduate with a bachelor’s degree.[2] That’s why it’s essential to know what you’re getting into before you sign your name on the dotted line.

Your first step is understanding the different types of loans available to you as a college student and the big defining line is federal vs private. You have the choice between federal student loans offered by the U.S. government and private student loans offered by private lenders.

Though both types of loans can help you get through school, the processes of qualifying for and repaying them can be very different. This article focuses on six ways federal student loans are different from private student loans.

Private comes with a credit check, federal typically doesn’t

So, you’re ready to take out a loan to pay for your education. Perhaps you’re fresh out of high school and have never had a line of credit. Or perhaps you’re returning to school and your credit score is lower than you hoped.

With federal student loans, neither of these situations would be cause for alarm. The government doesn’t check your credit before you take out a federal student loan.*

On the other hand, private student loans are extended by private lenders, such as banks or credit unions. These lenders are likely to conduct a hard inquiry of your credit report and your cosigner’s if you have one. A hard inquiry can temporarily lower your credit score.

Requiring a credit check can make it difficult for students with no credit history to qualify for a loan. Federal student loans are likely the best option for those with bad or no credit.

*NOTE: If you are taking out federal PLUS loans, you will have to undergo a credit check to determine if you’re eligible.

Interest rates

Federal student loan interest rates are set by the government. They set the rates each summer for the coming school year, based on something called the 10-year Treasury Note Index. So, as rate indexes increase, the rates on student loans rise. When the index falls, rates are lower.

Often, federal rates are much lower than private student loan interest rates. These interest rates are also fixed, meaning they won’t change during the life of the loan.

Though some private student loans sometimes have interest rates lower than federal ones, those rates can vary widely. According to a 2022 report from Bankrate, some private loans could have a variable APR as low as 0.94% while others could have a fixed rate of 12.78%.[3] The rate you get will usually depend on your credit health whereas federal student loan rates are the same for everyone, regardless of their credit history.

Always shop around when it comes to interest rates. If you have fantastic credit (and you don’t mind giving up the repayment plans and forgiveness programs mentioned below), then a low-interest private loan may work for you. However, for most people, federal student loans are usually the safer bet.

Postponing payments

Deferment is a temporary period during which you are not required to make any payments on your student loans. Federal student loans have an automatic six-month deferment after graduation or dropping below half-time enrollment. When in deferment, these loans won’t accrue interest.

You can also request deferment if you are facing financial hardship or military deployment. You must meet the requirements and manually request this.

To see if private student loans have terms of deferment, you need to check with the lender. Postponing private student loan payments is not regulated in the same way it is for federal student loans.

Similarly, forbearance may be offered by private lenders but is not as standardized or regulated as it is for federal loans. Forbearance is like deferment, but your loans will accrue interest during the period of paused payments.

Repayment plans

The government has an extensive list of payment plans that you can’t use for any private student loans. All private student loan payments must be negotiated directly with the lender.

By default, federal student loans are on a standard repayment plan that ranges from 10 to 30 years depending on how much you owe. But other repayment plans can help you pay even less per month than you would on a standard plan.

Here are some examples of federal student loan repayment plans that private student loan borrowers are ineligible for:

  • Graduated repayment: Start with lower payments than the standard plan for 24 months, then add 7% every two years thereafter. The idea is that the payments will grow as your income grows, making it easier to pay everything off over time.
  • Income-based repayment: This is an income-driven repayment plan that typically sets your payments to around 15% of your annual gross income (AGI). After 25 years, any remaining balance is forgiven.
  • Income-contingent repayment: This is another income-driven repayment plan and is similar to income-based repayment. This plan typically sets your payments to around 20% of your AGI.
  • Pay as You Earn (PayE): Federal student loans borrowed after October 2011 may be eligible for PayE, a program that assists borrowers facing financial hardship. Payments are set to 10% of your AGI and can be skipped or reduced if you fall below your state’s poverty line.

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Loan forgiveness

Getting your student loans forgiven is the dream, right? It’s not easy, but it can be possible – for those with federal student loans, anyway.

Student loan forgiveness programs rarely ever apply to private loans. Especially if you are entering a career field like medicine or teaching, know that you may be eligible for loan forgiveness in the future if you have federal loans.

Some current federal student loan forgiveness programs include:

  • Public Service Loan Forgiveness (PSLF): The most well-known student loan forgiveness program. Any amount of debt is eligible as long as the borrower works 10 years in a qualified public service profession while making payments on a hardship-based repayment plan.
  • Federal Perkins Loan Cancellation: Any amount of Perkins Loan debt is eligible for forgiveness if the borrower works full-time in a qualifying career.
  • Military Student Loan Repayment Program: With three years of qualifying U.S. Military service, student loan borrowers are eligible to have $10,000 of debt forgiven per year, with a cap of $60,000.
  • National Defense Education Act: Full-time teachers at schools serving low-income families could get up to $75,000 of Stafford/PLUS graduate loans forgiven.

Keep in mind that even if you are eligible for forgiveness, it is a stringent process that needs lots of attention. You must stick to all deadlines and maintain the proper documentation.

Debt consolidation

Consolidation means combining all your loans into one larger loan, often with a lower interest rate.  There are a few different ways to consolidate student loans, and they vary depending on whether you have private or federal.

Refinancing is one of the many ways you can consolidate and lower the total cost of repaying your loans. Private student loans can be consolidated and refinanced like any other loan. However, refinancing federal student loans involves converting them into private loans. So, you technically can’t refinance federal student loans if you want to keep the benefits of them being federal.

If you do want to keep your federal student loans, you can use a Federal Direct Consolidation Loan instead. Consolidating your federal student loans is a simple process and keeps you eligible for the various repayment and forgiveness plans mentioned above, though it often doesn’t mean a lower interest rate.

The final word on federal vs private student loans…

These six factors differentiate federal student loans vs private student loans:

  • credit checks
  • interest rates
  • postponing payments
  • repayment plans
  • loan forgiveness
  • debt consolidation

Most federal loans don’t require a credit check, while private lenders usually conduct a hard credit inquiry to determine your eligibility. This can make private student loans difficult to get for those with bad credit or no credit.

Interest rates are one of the most important differences between federal vs private loans. Federal loans have fixed rates set by the government, while private rates are set by lenders and can be much higher or more volatile.

Postponing payments through deferral or forbearance can be possible for both federal and private loans. However, federal loans have a standardized process that can be more reliable.

There’s a rich variety of federal student loan repayment plans that don’t apply to private loans. It’s possible to negotiate payment plans with private lenders, but some federal plans just can’t be beaten.

Qualifying for loan forgiveness is also much easier for federal student loan borrowers. Most forgiveness programs are facilitated by the government and don’t cover private loans.

Debt consolidation is possible for both types of loans, but it works differently and can change the repayment and forgiveness programs you can access.

All things considered, while private student loans can work for some students in specific situations, it’s best to stick with federal student loans in most cases.

Not only are they easier to get, but they have more repayment options and forgiveness.

Already have private loans? No problem. Just keep these differences in mind as you navigate repayment and consider federal loans in the future. And if you’re having trouble repaying those loans, see our guide on private student loan debt settlement.

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