Which best describes the difference between a federal student loan and a private student loan?

Though there are two major sources of student loans — federal and private – the federal side dominates the action, both in amount of money available and loan repayment programs.

U.S. colleges and universities enrolled 17.5 million students in 2021, a huge number but, in fact, a slight dip from 2019 that experts connect to COVID-19 challenges. Roughly half of them received federal loans from the William D. Ford Federal Direct Loan Program.

The average student loan debt among 2021 college graduates who borrowed — 62% of all students — was $39,000.

Regional differences are significant. Higher-debt graduates emerge from colleges in the Northeast:

• New Hampshire, $39,410
• Pennsylvania, $39,027
• Connecticut, $38,546
• Rhode Island, $37,614
• Delaware, 37,447
• Maine, $33,591
• New Jersey, $33566
• Massachusetts, $33,256

Lower-debt graduates emerge primarily from colleges in the West

• Utah, $17,935
• New Mexico, $20,991
• Nevada, $21,254
• California, $21,485
• Wyoming, $23,444
• Hawaii, $23,557
• Florida, $24,629
• Washington, $24,645

Average student debt among graduates also hinges on which type of college or university was attended. The TICAS breakdown for the Class of 2018 (the latest year available):

• 66% of public college graduates had loans (average debt $25,500)
• 75% of private, nonprofit college graduates had loans (average debt $32,300)
• 88% of graduates from for-profit colleges had loans (average debt $39,950)

Private student loans are available, but every expert, even those who work for banks and credit unions, advise students to exhaust all avenues for federal aid first. Private student loans have some conditions and terms — very good credit or a cosigner needed – that make them difficult to obtain. The interest rates usually are higher than those on federal loans and there are some terms involved that aren’t part of federal loans.

Student loans come in many shapes and sizes, and the regulations for them can be different as well. There are several types for which you may be eligible.

Types of Federal Student Loans

There are five categories of federal student loans, including Direct Consolidation loans, the one many experts advise students to look into to make payments easier when they graduate.

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Parent PLUS Loans
• Graduate PLUS Loans
• Direct Consolidation Loans

Types of Private Student Loans

The door to borrow from private lenders doesn’t offer nearly as many choices. There are, in fact, only two options:

• Private Student loans
• Private Parent loans

Private loans differ, depending on the lender and conditions each one sets. The rates on private loans can be fixed or variable. Some private loans require payments while you are still in school.

Stafford Loans

The federal Direct Loan program is better known as Stafford Loans. These are available to undergraduate and graduate students alike. Money for these loans comes directly from the federal government.

Stafford Loans come in two types: subsidized and unsubsidized. The type helps determine your interest rate and maximum loan amount.

Subsidized Stafford Loans

If your loan is subsidized, you won’t be responsible for making any payments until after you graduate. Under normal circumstances, the federal government pays the interest (rates set by federal law) on subsidized loans.

However, the CARES Act, passed in March 2020 in response to the coronavirus pandemic, zeroed out the rate on all federal student loans. On his first day in office, President Joe Biden extended the moratorium through May 1, 2022.

Subsidized loans are reserved for students who can demonstrate a financial hardship. Most go to students whose families’ annual income is less than $50,000.

If you’re an undergraduate, the maximum annual amount of a subsidized loan depends on your year in school. Here’s the breakdown for students who are dependents (subsidized maximum in parentheses):

• First-year undergraduate, $5,500 ($3,500)
• Second-year undergraduate, $6,500 ($4,500)
• Third-year and beyond undergraduate, $7,500 ($5,500)
• Aggregate loan maximums, $31,000 ($23,000)

Here’s the breakdown for students who are independent (subsidized maximum in parentheses):

• First-year undergraduate, $9,500 ($3,500)
• Second-year undergraduate, $10,500 ($4,500)
• Third-year and beyond undergraduate, $12,500 ($5,500)
• Aggregate loan maximums, $57,500 ($23,000)

Graduate- and professional-degree-seeking borrowers are discussed in the next section.

Unsubsidized Stafford Loans

Outside of pandemic emergencies addressed by Congress and/or the president, unsubsidized loans require the borrower to pay the accumulated interest. But not until you graduate, drop out, or otherwise fail to qualify as a full-time student.

The suspended interest rate on undergraduate loans beginning July 1, 2020, was 2.75%. For graduate students and professional-degree seekers, it was 4.3%. Parents PLUS loans checked in at 5.3%.

Your annual Stafford Loan limit for unsubsidized loans ranges from $5,500 to $12,500, depending on your year in school and whether you are claimed as a dependent on someone’s tax return (see the bullet points above).

If you are financially independent, you’re eligible for a larger loan. If you’re financially dependent but your parents are ineligible for Parent PLUS loans, you’re permitted the same maximum loans as if you were independent.

Graduate students have access to unsubsidized Stafford loans. There is no requirement to demonstrate financial need, which means that almost anyone is eligible.

There are, however, limits on how much you can borrow. If you’re a graduate student, you have a higher annual limit of $20,500. In total, your undergraduate and graduate Stafford Loans cannot exceed $138,500. The highest limits are reserved for medical students: You may borrow up to $40,500 annually and $224,000 in total.

Additional financial aid may be available in the form of grants and scholarships for graduate students.

To apply for a Stafford loan, complete the Free Application for Federal Student Aid (FAFSA).

Direct Consolidation Loans

Most students receive loans from a different borrower every year, if not every semester, so it is commonplace to have 8-10 student loan payments due every month when you finally graduate.

You can simplify the repayment process by applying for a Direct Consolidation Loan, which can best be defined as: one payment to one servicer, once a month.

The Direct Consolidation loan is a fixed-interest loan with flexible options, based on your ability to repay. There is no fee to consolidate student loans, though you can do it only once. It could lower your monthly payments, but also could extend the amount of time needed to pay off the loan.

Direct Consolidation Loans cut down on the torture of having to remember multiple due dates for various amounts to a variety of lenders. It also should help reduce (or eliminate) late fees when you miss a payment.

The downside — of course there’s a downside — is, depending on the Direct Consolidation Loan program, you could end up stretching payments over a longer period and paying more in interest on the debt. Also, you could lose some of the benefits offered by the original loan, such as eligibility for loan forgiveness programs and interest rate discounts.

Private student loans are not eligible for the Direct Consolidation Loan program.

PLUS Loans

PLUS loans are available for both parents and graduate students. Parent PLUS loans are for parents of dependent undergraduate students, and Grad PLUS loans are for graduate students themselves.

As with other education loans, PLUS loans are funded directly by the federal government. Unlike traditional student loans, they have no maximum amounts and can be used to cover education costs not covered by other financial aid.

Before they were suspended by the CARES Act, Direct PLUS Loans for parents and graduates carried a 5.3% interest rate, fixed for the life of the loan.

Perkins Loans Discontinued

The Perkins Loan program was extremely popular with need-based college students, but, having extended its life by two years in 2015, Congress allowed it to expire September 30, 2017. Disbursements continued through June 30, 2018.

Perkins Loans were more desirable than Stafford Loans because they were subsidized (government paid the interest while you were in school) and had a fixed interest rate of 5%. Other advantages of the Perkins loan included a longer grace period (nine months) before repayment began and special loan forgiveness provisions.

Because of their favorable terms, Perkins Loans were reserved for students who show exceptional financial need. The loans were granted by a college; but not all schools participated.

Private Education Loans

Private education loans, also called alternative education loans, are an option for students and parents who still can’t meet financial obligations for attending college, even with money available through federal loans.

Accounting for 8.4% of outstanding student loan debt ($137 billion), new private student loan origination has, since 2012, outpaced nearly every other consumer financial product, including credit cards and auto loans, according to Student Borrower Protection Center.

Private student loans peaked at $22.35 billion in 2008. After dropping by two-thirds over the next three years, private loan disbursements have steadily inched higher, to $13.1 billion (or 16% of the student loan market), for the 2019-2020 academic year.

About one sixth of student loans went to for-profit colleges.

Private education loans more closely resemble personal loans than student and parent loans. Your eligibility and interest rate depend on your credit history. Your interest rate could be fixed or variable and is typically higher than with federally guaranteed education loans but lower than with other debts such as credit card debt.

You still may qualify for a private student loan with bad credit.

Other drawbacks on private loans are that they are not subsidized; some require payments while you’re still in school; and deferment and forbearance options are limited.

Health Professions Student Loans

Specialized student loans exist for students studying specific areas of medicine such as nursing, dentistry, optometry, sports medicine, or veterinary medicine. Each loan has its own requirements about accepted areas of study and financial need.

Learn more about medical education loans from the Health Resources and Services Administration (HRSA), a part of the U.S. Department of Health and Human Services.

Despite your financial standing or field of study, you can find an education loan that suits your needs. It can help you and your family to fund your higher education and reduce the financial burden of school.

Comparing Federal Loans vs. Private Loans

The great majority of student loans are made through the William D. Ford Federal Direct Loan Program, but when students need more help to complete their college education, they turn to private lenders, such as banks or credit unions.

The major difference between federal student loans and private student loans is the cost and the use of credit scores in determining eligibility.

Undergraduate students applying for federal loans will not have to go through a credit check. Graduate students seeking federal loans must go through a credit check and could be denied loans if there is adverse information in their credit history.

Credit checks are the norm for public loans. A credit score of 640 or better is required and, depending on the terms and conditions, you may need a score much higher than that to be approved.

Other differences between public and private student loans include:

• Interest rates on federal loans are fixed. The interest rates on private student loans can be variable or fixed and usually are higher.
• Undergraduate borrowers who can demonstrate financial need could receive a federal subsidized loan, meaning the government pays the interest until you graduate. Private loans never are subsidized. You pay all the interest.
• Federal loans offer flexible repayment options and loan forgiveness programs. Some substantial portion of federal loans may be forgiven if Democrats in Congress have their way. Private loans have few repayment options, no loan forgiveness programs, and are unlikely to be included for amnesty in any federal legislation.
• Federal loans don’t have to be repaid until you graduate or drop below half-time status as a student. Many private loans ask for repayment while you’re still in school.