Which Is Better: Private or Federal Student Loans?

Federal student loans have many advantages over private student loans.

Federal student loans are almost always a better choice than private student loans. This is because federal loans usually have lower interest rates, more flexible repayment plans, programs to permanently reduce payments or give you a temporary break on payments if your income is low or you suffer from a financial hardship, and avenues for certain borrowers to cancel loans.

You should consider taking out private student loans only when you have 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.

Below you can learn why federal student loans are a better option for student borrowers than private loans.

What Is a Federal Student Loan?

A  federal student loan  is a loan taken out from the U.S. Department of Education to cover post-secondary education expenses. (Prior to June 30, 2010, the federal government also "guaranteed" loans it didn't make -- these loans are also considered to be federal student loans.)

What Is a Private Student Loan?

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 June 30, 2010, not guaranteed by the federal government. The terms of a private student loan are set by a borrower agreement.

Federal Student Loans: Pros and Cons

There are many advantages to taking out federal student loans, and a few disadvantages


The advantages of federal student loans are many:

  • Private student loans require either a good credit history or a co-signer with a good credit history. Federal student loans do not.
  • Generous and flexible repayment options can lower your monthly payment. (To learn about federal student loan repayment options,see  Student Loan Repayment Options.)
  • Federal student loans are eligible for deferment and forbearance (a temporary reprieve from making payments) — important options if you have a serious issue with your ability to pay. (Learn more about deferment and forbearance in  Student Loans: Cancellation, Deferment, and Forbearance.)
  • Graduate students with federal student loans from undergraduate education are eligible for deferment of the undergraduate loans while still in school.
  • All federal student loans have fixed interest rates, and usually the fixed rates are lower than the fixed rates for private loans. If a private lender is offering a very low rate, it is probably a teaser rate for a variable interest rate loan.
  • If you have financial need, you will qualify for a subsidized loan. The subsidy covers some of the interest that accrues while you attend school.
  • Federal student loans do not have a prepayment penalty fee. If you are able to pay off your loans early, you won’t have to pay extra fees.


There are a few downsides to federal student loans.

  • If you go into default on your loan, the federal government has more options to collect from you than does a private lender. The federal government can start garnishing your wages with only the promissory note you signed (it does not have to first get a court judgment). It can also intercept tax refunds and some social security payments. But remember that the generous repayment plans available to federal borrowers make it much less likely that you will default in the first place.
  • Federal student loan debts do not have a statute of limitations. A statute of limitations sets a time limit for a lender to sue you for unpaid debt. (Learn more about  how statutes of limitations work.)

Private Student Loans: Pros and Cons

Although there are a few upsides to private student loans, for the most part, the long list of downsides outweigh them.


  • The main advantage of private student loans is that they are available when you have exhausted your ability to borrow federal loans.
  • You do not need to fill out a FAFSA to get a private student loan. However, the FAFSA now has a streamlined online application, available at  http://www.fafsa.ed.gov/.
  • Private student loans are subject to statutes of limitations. The length of time a lender has to sue you for unpaid debt depends on which state you live in. Limitations periods range from three to 15 years. To find out the limitations period in your state, see  Statutes of Limitations in All 50 States.


The disadvantages of private student loans track the advantages of federal student loans. The biggest cons to private loans are:

  • higher interest rates
  • less flexible repayment terms, and
  • the unavailability of deferment, forbearance, and cancellation.

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