The Difference Between Federal and Private Student Loans
Student loan debt is one of the most talked-about financial topics in America—and for good reason. With more than 43 million borrowers holding a combined total of $1.75 trillion in student loan debt, it’s a financial force that touches nearly every generation. From recent graduates navigating repayment to parents helping their kids borrow for college, student loans aren’t just a line item on a budget—they’re a key piece of the nation’s economic puzzle.
Understanding the difference between federal and private student loans is essential for anyone with student debt or considering taking it on. These two categories of loans might serve a similar purpose—helping people afford higher education—but they function very differently. That distinction can determine not just how much you borrow, but how much you pay, what kind of repayment support you receive, and whether you have options when times get tough.
Let’s break it down.
Federal vs. Private Student Loans: What’s the Difference?
The difference between federal and private student loans comes down to who’s lending the money and what rules come with it.
With Federal Student Loans, these loans have been funded by the U.S. Department of Education. They’re the most common type of student loan and account for 91.2% of all student debt, according to the Education Data Initiative. That’s $1.62 trillion in federal student loans alone.
The basic advantages of Federal Student Loans:
- Fixed interest rates, set by Congress at fixed intervals, recently changed back to using the treasury bill on July 1st of each year
- Subsidized loan options (for eligible students)
- Access to income-driven repayment (IDR) plans
- Eligibility for deferment, forbearance, and forgiveness programs
Because they’re backed by the federal government, federal loans are designed with protections in place to help borrowers manage repayment, especially during financial hardship.
On the flip side, Private Student Loans come from banks, credit unions, and other private lenders. These loans can help cover gaps in education funding that federal loans don’t meet. Private loans can be a helpful tool—but they function more like any other personal loan or line of credit. That means terms vary by lender, and the proper research is needed before continuing with this line of credit.
This distinction is very important as not all schools are eligible for federal student loans.
A Quick History of Student Loans
The U.S. student loan system wasn’t always this massive. It began in 1958, with the National Defense Education Act, which offered low-interest loans to students in science, math, and foreign languages—fields deemed essential during the Cold War.The system expanded in 1965 with the creation of the Federal Family Education Loan Program (FFELP), which allowed private banks to lend to students with government backing. This system carried on for decades until 2010, when the government shifted to Direct Lending, ending FFELP and making the Department of Education the sole provider of federal student loans.
Qualifying for Federal Student Loans
Not all schools qualify for federal loans, but most do. Schools must be designated “Title IV” for students to receive federal loans to attend. Title IV schools cover a broad range of colleges and universities and account for the majority of higher education institutions. The FAFSA (Free Application for Federal Student Aid) form is used to apply for student aid; a school must have a unique Federal School Code showing that school is a Title IV institution allowing schools to determine eligibility for student loans.
If the school is not Title IV (for example— lineman school, pilot school, or other programs directed toward obtaining some type of specific certification), then state student loans or private student loans are often the only financing methods available to those students.
Key Things to Know About Federal Loans
If you’re exploring student loans, there are a few critical concepts to understand:
Subsidized vs. Unsubsidized Loans
With subsidized federal loans, the government covers the interest while you’re in school at least half-time, during the grace period, and during any deferment period, or time where there is no interest gained. These are only available to undergraduate students with demonstrated financial need based on the FAFSA.
Unsubsidized loans, which are available to both undergrads and grad students, begin accruing interest as soon as the loan is issued for that school year. If unpaid, this interest is added to the principal balance and thus increases the loan amount. This process is generally what has led to a ballooning of student loan debt.
This difference can significantly affect how much you owe after graduation. Borrowers who don’t fully understand this may be surprised when their balance balloons, even if they haven’t missed a payment. Any interest not paid while in school will be added to the principal balance (see Capitalization below).
Interest Accrual and APR
Federal loans typically offer fixed interest rates for each loan borrowed, meaning your rate won’t change over time. For the 2023–24 school year, undergraduate loans carried a rate of 5.50%, while graduate loans had higher rates. Remember that each individual loan borrowed may have a different interest rate.
Some private loans advertise 0% APRs or deferred interest, but often only as introductory offers. Once that promotional period ends, rates can jump—sometimes significantly. It is important that any student loan borrower understands the rates, when the deferment period ends, and when interest starts accruing (stacking up) again as capitalization occurs.
Repaying Student Loans Effectively
Repayment can feel overwhelming—but planning makes a big difference. According to the Federal Reserve, the average monthly student loan payment is around $503. That’s a substantial chunk of many people’s income, especially early in their careers.
Here are key strategies:
Borrow only what you truly need for tuition, fees, etc. Do your best to cover regular expenses (rent, food, etc.) that are already in your budget.
Income-Driven Repayment (IDR) Plans
Federal student loans come with several IDR options, including the new SAVE plan, which can lower monthly payments to as little as $0 depending on your income and family size. These plans also offer forgiveness after 10–25 years of qualifying payments.
Deferment and Forbearance
Federal loans allow borrowers to pause payments during periods of hardship. Private loans may offer similar options, but they’re often more limited and vary by lender.
Refinancing and Finding Flexibility
When it comes to private loans, options like refinancing may be one of the few tools borrowers have to improve their situation.
Organizations like Yrefy, a company that specializes in delinquent and defaulted private loans, is working to support borrowers with distressed private student loans by offering refinancing programs tailored to people who’ve been overlooked by traditional lenders. Their mission focuses on creating fair, sustainable pathways for borrowers who want to regain financial control—even if their credit is less than perfect.
This type of innovation is crucial, especially as more people turn to private loans to bridge education costs not covered by federal aid.
Understanding the Ins-and-Outs
As you contextualize this information for yourself, and now better understand the key differences between federal and private student loans, it’s important to have a reference sheet for all the key terms that will be thrown your way over the coming years. Working to repay student loans is an uphill battle, and having the education and literacy to understand key terms is a small step in the right direction.
Key Terms and Definitions
- Federal Student Loans – Loans issued by the U.S. Department of Education. They offer fixed interest rates, flexible repayment options, and borrower protections like deferment and income-driven repayment.
- Private Student Loans – Loans issued by private lenders such as banks, credit unions, or online lenders. Terms vary based on credit and lender policies. These loans typically offer less flexibility and fewer borrower protections.
- Subsidized Loans – A type of federal loan for undergraduate students with financial need. The government pays the interest while you’re in school at least half-time, during the grace period, and during deferment.
- Unsubsidized Loans – Available to both undergraduate and graduate students, these federal loans begin accruing interest immediately after disbursement, even while you’re still in school.
- Interest Accrual – The process by which unpaid interest accumulates over time. For unsubsidized and private loans, this begins as soon as the loan is disbursed.
- Capitalization – When unpaid interest is added to your loan’s principal balance, increasing the total amount you owe over time.
- Consolidation – A method to combine individual loans into one loan. It may result in an overall lower payment versus needing to pay the minimum (or more) for each loan borrowed.
- Fixed Interest Rate – An interest rate that stays the same for the life of the loan. Common with federal loans, however, each new year of loans borrowed may have a different interest rate.
- Variable Interest Rate – An interest rate that can change over time based on market conditions. Often found with private loans.
- Income-Driven Repayment (IDR) – Federal repayment plans that adjust your monthly loan payments based on your income and family size, with potential loan forgiveness after a set period.
- Deferment – A temporary pause on loan payments during periods like school enrollment, unemployment, or military service. Interest may or may not accrue during this time.
- Forbearance – A temporary pause or reduction in loan payments due to financial hardship. Interest continues to accrue during forbearance.
- Refinancing – Replacing one or more existing student loans with a new loan, ideally with a lower interest rate or better terms. Can simplify payments but may result in loss of federal loan benefits if federal loans are refinanced into private ones.
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The information contained in this article is meant to serve as general guidance for consumers and not meant to serve as comprehensive financial advice. For questions about your individual circumstance, finances, or accounts, please contact your creditor(s) and/or financial advisor directly.
