Student loans can come from many different funding sources. There are multiple lenders and loan types to choose from, but one of the most important distinctions is the difference between federal and private student loans. Understanding these two options and how they differ is a fundamental step in making a good financial decision.
Both federal and private student loans can seem complicated. Abe created this guide to clearly break down the differences, helping you choose the option that best fits your financial and educational needs.
Federal vs. Private Student Loans: Key Differences
Federal and private student loans differ in several key categories, including the funding source, interest rates, eligibility, and repayment flexibility. Here’s a brief overview of each across these areas.
| Federal Student Loans | Private Student Loans | |
|---|---|---|
| Funding Source | The U.S. Department of Education funds the loan. | Banks, fintechs, credit unions, or other private lenders fund the loan. |
| Interest Rates | Interest rates are fixed and set each year. | Interest rates can be fixed or variable, and are based on credit. Applicants with good credit often receive lower rates. |
| Eligibility | Eligibility is based on economic need. | Eligibility is based on creditworthiness: the ability of the borrower(s) to repay the loan. |
| Repayment Flexibility | Flexible repayment plans, loan forgiveness available in some cases. | Repayment and relief options vary by lender. |
| Application Process | Applicants must file the Free Application for Federal Student Aid (FAFSA®). | Applicants should start by filing the FAFSA to identify any funding gap before applying for a private student loan, which can typically be done online. |
| Lending Limits | Borrowers can take out a lifetime maximum of $257,500 in government loans, only $23,000 of which comes from subsidized loans. | Limits vary by lender but are generally higher than federal student loan limits. |
| Cosigners | Cosigners are not required. | Cosigners are typically not required but students applying with a limited credit history typically need a cosigner for approval. |
| Fees | Typically, 1.057% for Direct Subsidized/Unsubsidized loans and 4.228% for PLUS loans. | Fees vary by private lender, but most do not charge origination fees. |
Loan Source
One of the most basic differences between federal and private student loans is who funds them. A federal loan, as the name suggests, is funded by the federal government — more specifically, the Department of Education. By contrast, a private loan, like Abe®, is funded by a private lender, such as a bank, credit union, or fintech company.
Because private student loans can be funded by varying sources, the terms offered by each lender can differ widely. Consequently, you should always compare rates, eligibility, repayment options, and other factors between lenders if you are considering a private student loan.
Interest Rates
Federal and private student loans also differ in the interest rates offered. While federal rates are fixed and set each year, private student loan rates can be either fixed or variable, depending on the lender.
You can check current federal interest rates on the official Federal Student Aid website. Keep in mind that Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans all have unique rates, so double-check to ensure you’re looking at whichever loan type applies to you.
Some private student loan lenders offer fixed rates, which do not change for the life of the loan, while others offer variable rates, which can fluctuate up or down across the life of the loan. In general, private student loan rates are often higher than federal student loan rates, but they can be lower for applicants with good credit in some cases. Student applicants can often qualify for a lower rate by adding a creditworthy cosigner to their application.
Eligibility
Another important difference between federal and private student loans is how eligibility is determined. Federal student loans are awarded based on the financial need of the applicant(s). Applicants must complete and submit the Free Application for Federal Student Aid (FAFSA®) form for the government to determine whether they are eligible and for how much.
Private student loans are based on creditworthiness, just like car or home loans. Applying for a private student loan will entail a credit check, where the lender pulls your credit report to get a picture of your ability to pay back the borrowed amount.
Because a hard credit pull impacts your credit score, many lenders offer prequalification tools to give you an idea of your eligibility before submitting for a hard credit pull. Prequalification involves a soft credit pull, which does not impact the credit score(s) of the applicant(s), but gives you enough information upfront to make an informed decision before moving forward with submitting for a hard credit pull.
Many student applicants applying for an education loan do not have a credit history, which is where cosigners come in. While you do not necessarily need to have a cosigner to apply for a private student loan, having one can improve your approval chances and may get you a better rate.
Private student loans may allow higher borrowing limits for eligible students than federal student loan alternatives. Currently, there is a $257,500 lifetime maximum borrowing limit on federal student loans for any student applicant, and only $23,000 of that can be subsidized. The difference comes down to who covers the interest: on subsidized loans, the government pays the interest while you’re enrolled at least half-time and through your grace period, but these are reserved for undergraduates with demonstrated financial need. Unsubsidized loans are open more broadly, to undergraduate and graduate students regardless of need, but interest starts adding up the moment the loan is disbursed, so the balance can grow before the first payment is ever made and it is the borrower’s responsibility to pay it back. Private student loan borrowing limits typically go beyond the federal cap for those who are eligible.
Fees
Federal student loans charge you an origination fee. This is a charge to cover processing of your loan and may vary depending on the type of federal student loan you are seeking. Origination fees are typically 1.057% of the total loan amount for Direct Subsidized and Unsubsidized loans and 4.228% for Direct PLUS loans.
Private student loans typically do not charge origination fees. For private lenders who do charge origination fees, the amount varies depending on the lender.
Benefits, Discounts, and Rewards
Both federal and private student loans offer varying borrower benefits and discounts that are worth considering. Federal student loans offer a 1% interest rate reduction for eligible borrowers who enroll in auto pay, and some government or not-for-profit employees may qualify for public student loan forgiveness (PSLF), a program that forgives a borrower’s remaining balance after meeting certain employment and repayment criteria.
As with many other categories, private student loan benefits, discounts, and rewards vary by lender. Abe offers an interest rate discount for auto pay,18 as well as rate reductions for every six months of consecutive, on-time payments, up to 0.25%.9 Graduates may also receive a 2% reduction of their principal balance upon request as a reward for completing their degree,8 and borrowers can apply to release their cosigner after just 12 months of on-time payments.13
Repayment Flexibility
While federal student loans may come with lower borrowing limits, they do tend to be more flexible than many private student loan options. The Department of Education allows you to change your repayment plan based on your current needs, and loan forgiveness is sometimes available for certain borrowers.
As in many other categories, repayment options vary by lender when it comes to private student loans. Some lenders are inflexible, but Abe offers multiple loan options, including five different loan terms,3 in-school payment plans, deferment,20 and the potential for rate discounts. And if the unexpected happens while you’re still in school, Abe offers In-School Default Protection4 which automatically shifts eligible loans into full deferment — pausing payments while you are enrolled in school rather than letting the loan slip toward default. It’s a built-in way for your repayment to flex when your circumstances change, much like the adjustments you’d make on the federal side.
Other Factors to Consider
Funding source, interest rates, eligibility, borrower benefits, and repayment flexibility are the most important differences between federal and private student loans. However, there are other, smaller distinctions to consider, too.
Many federal undergraduate loans are subsidized, which means the government will cover any interest the loan accrues while you are enrolled at least half-time. Unsubsidized loans are available to a wider range of students but charge and collect on interest while you are enrolled. Private student loans are more similar to unsubsidized loans, as you are responsible for paying back the interest that accrues while you are enrolled in school.
The application process likewise varies between the two. Applying for a federal student loan means filling out the FAFSA, which involves providing documentation to prove your eligibility, and selecting at least one school to receive your information. With a private student loan, you must complete an application and may also be required to provide documentation to verify your creditworthiness rather than your financial need.
If you want to attend graduate school, you should also consider how federal and private student loans differ. All federal graduate student loans are unsubsidized, but the borrowing limit is often much higher than undergraduate limits. Abe likewise offers higher limits for graduate and professional programs.1 Private lenders vary widely in their graduate options and terms, so always perform thorough research before making a decision.
Federal vs. Private Student Loans: Which Is Right for You?
In general, it’s best to max out your federal opportunities before pursuing a private student loan. The savings potential from unsubsidized loans, wider availability, and repayment flexibility all make federal student loans worth prioritizing. Once you have received all the federal aid you can, though, a private loan can be a useful way to cover the remaining costs.
After you have maximized your federal aid, you should compare private student loans to get the best deal for your needs. Start by looking at each lender’s eligibility criteria to see what you may qualify for, and then compare interest rates, repayment options, and loan terms. That includes expected payoff timelines, what the loan covers, and borrowing limits.
Private lenders offering more flexibility and potential discounts are worth considering above more rigid options. As you look, remember to consider whether you would need a cosigner or how having one could help you secure better loan terms. Having a cosigner with good credit can be an excellent way to reduce your overall payments, where available.
Learn More About Private Student Loans Today
Now that you know what the difference is between federal and private student loans, you can take steps toward a more informed decision. Taking out a loan is a big responsibility, so thorough research is crucial to making the best choice. That includes recognizing why it’s important to maximize federal opportunities before applying for a private student loan, as well as how to choose between private lenders to cover the rest.
You can explore our frequently asked questions to learn more about private student loans and what to expect from an Abe student loan. Our blog has additional resources for you to learn about student loans to help you make a more confident decision.