Federal vs. Private Student Loans

Last Updated: September 21, 2021 by Melanie Hanson

For the borrower, the key differences between federal and private loans have to do with eligibility, risk, and repayment.

Federal vs. Private Student Loans
Federal Private
Average APR 4.12% 6.50%
Typical Debt $37,105 $54,400
Average Total Borrowed $30,800 $40,000
Borrower Eligibility Mostly determined by financial need; only PLUS loans require credit check Always determined by financial standing; always require credit check
Interest Rates Fixed only Fixed or variable; availability varies by lender
Loans Available Direct Subsidized and Unsubsidized (Stafford) Loans, PLUS Loans, Consolidation Loans Student loans, parent loans, refinance loans; availability varies by lender
Debt Relief Options Multiple options include repayment plans, deferment, discharge, etc. Very limited debt relief, if any; availability varies by lender

*Private loan statistics are based on estimates due to limited available data.

Federal vs. Private Student Loans

A private student loan may come from a privately owned bank or credit union. State-affiliated organizations may also offer private student loans. In any case, each lender sets its own loan terms and conditions. Some private lenders offer parent loans, as well.

Federal student loans, meanwhile, are issued by the federal government. Federal legislation determines all terms and conditions of the loan, including special legal protections and benefits that private loans don’t have. Federal student loans include parent loans.

Financial experts recommend students exhaust federal student loan resources before pursuing private loans. In fact, most borrowers use private loans to supplement federal loans. Federal loans are themselves designed to supplement educational funds; alone, they are insufficient to cover the cost of in-state tuition at an average public 4-year institution.

Federal Interest Rates for 2021-22
Student Borrowers Loan Type Interest Rate
Undergraduate Stafford 3.73%
Graduate & Professional Stafford 5.28%
Parent, Graduate & Professional PLUS 6.28%
Federal Interest Rates for 2020-21
Student Borrowers Loan Type Interest Rate
Undergraduate Stafford 2.75%
Graduate & Professional Stafford 4.30%
Parent, Graduate & Professional PLUS 5.30%

Federal Student Lending

Federal student loans are “safer,” with special benefits and legal protections. Under certain conditions, for example, federal loans may be forgiven in whole or in part, usually after a minimum of 10 years of consistent repayment history on the loan. A full discharge may also be available in the event of borrower death or total permanent disability.

In cases of temporary disability, borrowers may apply for deferment or forbearance of payments. Other forms of hardship, such as involuntary unemployment or natural disaster, may qualify borrowers for temporary deferment or forbearance of payments. Federal loans also offer debt relief via income-based or income-sensitive repayment plans.

Federal loans may also be subsidized, meaning the U.S. Department of Education (ED) covers the cost of interest while the borrower is in school at least half-time. Such subsidies are not available for private loans. Federal borrowers of the same education level all have the same fixed annual percentage rate (APR) for every borrower regardless of financial standing. In most cases, good financial health is not a prerequisite. Only PLUS loans have credit requirements.

There are few drawbacks to federal student borrowing. Federal loans may be consolidated only once, which involves averaging loans’ APRs rather than renegotiating and possibly reducing the consolidation loan’s APR, as one may do in refinancing. Though most private refinance lenders will refinance federal loans in addition to private loans, doing so effectively turns a federal loan into a private loan; this disqualifies the debt from any of the protections and benefits it had under federal administration.

Federal Student Loan Origination Fees
Loan Type(s) Disbursement Period Origination Fee
Direct Subsidized & Unsubsidized 10/1/2020-09/31/2022 1.057%
Direct Subsidized & Unsubsidized 10/1/2019-09/31/2020 1.059%
Direct PLUS Loans 10/1/2020-09/31/2022 4.228%
Direct PLUS Loans 10/1/2019-09/31/2020 4.236%

Federal Direct Subsidized Loans

Direct Subsidized Loans or subsidized Stafford Loans are available to undergraduate students who demonstrate financial need in their Free Application for Federal Student Aid (FAFSA).

The ED pays the interest from Direct Subsidized Loans on behalf of undergraduates who are in school half-time, those who graduated within the last six (6) months (a window that is typically referred to as the “grace period”), or have been approved for temporary deferment of loan payments. The fixed annual percentage rate (APR) for the 2021-22 academic year is 3.73%. For 2020-21, Subsidized Loans had a 2.75% APR; this is a 35.6% increase year-over-year (YoY).

Direct Subsidized Student Loan Annual Limits
Undergraduate Level Loan Limit
First Year $3,500
Second Year $4,500
Third-Fifth Year $5,500
Total Limit $23,000

Federal Direct Unsubsidized Loans

Direct Unsubsidized Loans or unsubsidized Stafford Loans are available to undergraduate and graduate students, including postgraduate and professional students. Financial need is not a prerequisite; students must submit the FAFSA in order to qualify.

Student borrowers are responsible for paying interest on their Direct Unsubsidized Loans from the time of disbursement whether they’re in school or not. For the 2021-22 academic year, the APR for undergraduate student borrowers is 3.73% while graduate students may borrow at 5.28%. For the 2020-21 academic year, these loans had a 2.75% and 4.30% APR, respectively.

Direct Unsubsidized Student Loan Annual Limits
Education Level Dependent Student Independent Student
Undergraduate $2,000 $6,000
Undergrad Total Limit $8,000 $34,500
Graduate $20,500 $20,500
Graduate Total Limit $138,500 $138,500
Pharmacy Graduate $33,000 $33,000
Health Professional $40,500 $40,500
Health Professional Total Limit $224,000 $224,000

Federal Direct PLUS Loans

Unlike other federal loans, PLUS Loans are awarded based on financial standing. Borrowers, whether they are students or parents, must undergo a credit check in order to qualify for a PLUS Loan. Good credit is a prerequisite for PLUS Loan borrowing, but applicants with poor credit may be eligible if they meet certain other strict requirements.

Grad PLUS loans are available to graduate students, including postgraduate and professional students. For Grad PLUS loans disbursed for the 2021-22 academic year, the APR is 5.28%. In 2020-21, Grad PLUS Loans had a 4.30% APR; this is a 22.8% YoY increase.

Parent PLUS loans are available to parents of dependent students. For Parent PLUS Loans disbursed for the 2021-22 academic year, the APR is 6.28%. For 2020-21, Parent PLUS Loans had a 5.30% APR; this is an 18.5% YoY increase.

Consolidation Loans

Most students who use federal loans borrow more than once. After graduation, these students have multiple loans to repay. This can be confusing, especially if the loans carry different APRs. In order to simplify repayment, federal student loan borrowers may consolidate their loans. Consolidation involves combining loan debts with a weighted average APR.

Consolidation is not to be confused with student loan refinancing. Key differences include qualifying loans and interest rates; only federal loans may be consolidated, whereas only refinancing offers the opportunity to ultimately reduce interest rates (whereas consolidation merely averages existing interest rates).

Perkins Loans

New Perkins Loans are no longer available; the last distribution period ended in June 2018. Perkins Loans are often included in lists of Federal Loans, however, given that a significant portion of Perkins borrowers are still repaying their debt. These were very low-interest loans that were awarded to students demonstrating extreme financial need.

Private Student Lending

Because federal student loans are generally preferred, private lenders must advertise lower interest rates in order to compete in the marketplace. Still, only borrowers with excellent credit qualify for the lowest rates. Most people who borrow private loans use them to supplement federal loans; just 7.76% of student loan dollars are from private loans.

Private loans typically have both fixed and variable APRs, giving you the option to select your own rate. Some lenders offer additional interest options, such as hybrid rates (a combination fixed-variable interest rate) or balloon loans (the latter requires reduced repayments up front and a large, lump-sum payment at the end of the loan term).

Compared to federal loans, however, private lenders offer significantly fewer opportunities for debt relief. Most lenders do not offer income-based repayment options or other such borrower protections. A private lender may offer one or two options for temporary debt relief, most commonly in the form of limited deferment or an interest-only period. Any debt relief is only available under strict conditions. Student loan forgiveness is rarely an option, the occasional exception being a case of borrower death. Some private lenders, however, do not discharge loan debt under any conditions.

While private student loans do not offer as much borrower protection as federal loans, private lenders are still beholden to certain laws. Private loan borrowers who suspect they may be a victim of financial malpractice may file with the Consumer Financial Protection Bureau and the Federal Trade Commmission. The most common consumer and legal complaint against private lenders is violation of the Truth in Lending Act.

Snapshot: Private Student Loan (Undergraduate) Rates
Private Lender Fixed Rates Variable Rates
SoFi 2.99% – 10.91% 0.99% – 11.47%
College Ave 2.99% – 13.24% 0.99% – 12.23%
Citizens Bank 3.23% – 11.70% 1.03% – 11.01%
Discover Bank 3.49% – 11.59% 1.12% – 10.22%
CommonBond 3.74% – 10.99% 3.78% – 9.59%

Private Student Loans

Private lenders offer student loans pending a credit check. Few lenders will approve someone with a low credit score for a loan and only do so under strict conditions. Furthermore, a poor credit score usually impacts the APR a lender is willing to approve. Most lenders advertise a range of starting rates, including the lowest rate possible, which is usually below federal interest rates.

In addition to APR approval based on credit history, most private lenders offer different rates to undergraduates than they offer to graduate students. Some lenders offer specialty rates and terms to postgraduate and/or professional students, as well as health professionals in residency. In most cases, borrowers are able to choose between a fixed and a variable interest rate, the latter of which changes periodically according to interest rate indices. Most private lenders advertise a variable rate cap (the highest possible variable APR), which is usually somewhere between 9.90% and 25.00%.

Private Parent Loans

Some private education lenders offer private parent loans, as well. A parent loan’s rates and terms are also based on credit score and financial history; as with regular student loans, there may be exceptions to the rule.

Though the benefiting student’s name is typically attached to a private parent loan, the loan itself has no impact on the student’s finances or credit report. Should a student wish to take over a parent’s loan debt, the parent loans would have to be refinanced with a private lender that authorizes the transfer of student loan debt ownership from parent to child.

Refinance Loans

Refinance lenders, which are always private organizations (the ED does not offer loan refinancing), generally offer refinancing for their own loans as well as federal loans and loans from any private lender; sometimes this includes parent loans in addition to student loans, as well as loans that have already been refinanced.

Experts caution that refinancing federal loans disqualifies them from the special legal protections and benefits that are only available with federal loans. Once federal loans have been refinanced, they cannot be restored to their federal status.

Snapshot: Student Refinance Loan Rates
Refinance Lender Fixed Rates Variable Rates
SoFi 2.74% – 7.19% 2.25% – 6.84%
College Ave 2.99% – 5.14% 2.94% – 5.04%
Citizens Bank 2.39% – 9.65% 2.24% – 9.40%
Discover Bank 3.49% – 6.99% 1.74% – 5.74%
CommonBond 2.59% – 6.99% 2.49% – 7.09%

Sources

  1. U.S. Department of Education (ED) Office of Federal Student Aid (OFSA), Types of Financial Aid: Loans
  2. ED OFSA, Federal Student Loan Portfolio
  3. National Center of Education Statistics, Fast Facts
  4. MeasureOne, Private Student Loan Report 2021
  5. CommonBond, Undergraduate Student Loans
  6. Discover, Student Loans
  7. CollegeAve, Undergraduate Student Loans
  8. SoFi, Undergraduate Student Loans
  9. Citizens Bank, Undergraduate Student Loans