For most student loan borrowers, federal student loans are a better choice than private student loans. Rates are typically lower, repayment options are more flexible, and cancellation options exist. Students should use federal student loans to the extent they are available—after first exploring scholarship and grant availability—and consider private loans only when federal aid isn’t enough to cover the costs of their education.
This article covers the most common types of federal student loans, and explains the most important differences between federal and private student loans.
If you submit an application for financial aid, you might be offered loans as part of your school’s financial aid offer.
Federal Direct Loans. Federal Direct Loans are loans made by the Department of Education. The four main types of Direct Loans are:
Federal Family Education Loans (FFELs). Prior to July 1, 2010, the federal government also guaranteed loans that private lenders made. These loans—called Federal Family Education Loan or FFEL loans—are also considered federal student loans.
Federal Perkins Loans. These loans are available to undergraduate and graduate students who have exceptional financial need. The federal government pays the loan’s interest while you are in school. Perkins Loans are available only at participating schools.
You can learn more about what types of loans you have through the National Student Loan Data System (NSLDS).
Federal student loans have many advantages when compared to private student loans, and just a few disadvantages.
Federal student loans are almost always a better choice than private student loans. Here’s why:
If you go into default on a federal student loan, the federal government has more options to collect from you than a private lender. The federal government can garnish your wages without first getting a court judgment. It can also intercept your tax refund and some Social Security payments. Also, federal student loans don’t have a statute of limitations. But keep in mind that the various repayment plans available with federal student loans make it much less likely that you’ll default in the first place.
A private student loan is a loan taken out from a bank, credit union, or other private lender to cover post-secondary education expenses and—if taken out prior to July 1, 2010—not guaranteed by the federal government.
Private student loans have a few upsides, but for the most part, the long list of downsides outweighs them.
The main advantage of private student loans is that they’re available when you’ve exhausted your ability to borrow federal loans. Unfortunately, with the rising cost of college and graduate school, many students must take out some private loans because they've maxed out on the available federal loans. (Get an overview about different ways to pay for college.)
Also, unlike federal student loans, private student loans are subject to a statute of limitations when you default. The statute of limitations varies by state, generally ranging from three to 10 years. If the statute of limitations expires, lenders have few options to collect from you.
The biggest downsides to private student loans are:
In addition, paying your private student loans isn’t always straightforward. Borrowers with private student loans have cited numerous problems related to making loan payments, like dealing with loan servicers that:
If you have a complaint about a private student loan, contact the Consumer Financial Protection Bureau (CFPB).
To learn more about federal student loans—and student loans in general—visit the U.S. Department of Education’s Federal Student Aid website.