Private Vs. Federal Student Loans: Which Is Better In 2025?

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Students borrowing money to pay for college have two options: Federal student loans and private student loans. Federal loans are issued by the federal government, while private student loans are issued by banks, credit unions and online lenders.

Federal student loans are the best option for most borrowers. They’re easy to qualify for and offer a range of repayment options. However, private student loans are a good choice for students who have reached the federal student loan borrowing limit or who don’t qualify for federal loans.

Federal vs. private student loans at a glance

Federal student loans

Federal student loans are unsecured loans issued by the U.S. Department of Education to cover higher education expenses. Eligibility is not based on your credit score, and the interest rate is fixed and the same for all borrowers in a given school year. It tends to be lower than most private student loans, especially for borrowers with no cosigner.

One major benefit of federal loans is the option for partial loan forgiveness with certain payment plans. They also offer multiple repayment plans to fit the borrower’s financial situation.

There are four main types of federal student loans. Your eligibility for each will depend on your financial need and whether you are an undergraduate or graduate student.

• Direct Subsidized Loans for undergraduate students with financial need. The U.S. government covers accrued interest on these loans while the student is in school and during deferment and grace periods.
• Direct Unsubsidized Loans for undergraduate, graduate and professional students regardless of need. Students are responsible for paying accrued interest.
• Direct PLUS Loans for graduate or professional students, or parents of dependent undergraduates. Eligibility is based on a credit check rather than need, and there is no dollar-amount cap. The cap is based on cost of attendance minus other financial aid received.
• Direct Consolidation Loans that consolidate multiple federal loans into one monthly payment.

Benefits of federal student loans

Federal student loans have several benefits when compared to private student loans.

• Access to income-driven repayment plans: The Department of Education offers several income-driven repayment plans, which can reduce your monthly payment to as little as 10 percent of your discretionary income. If you struggle to make your monthly payments, these plans can make the difference between staying on track and defaulting.
• Few to no credit requirements: Most federal student loans don’t require a credit check at all. Direct PLUS loans use a credit check to determine if you have certain negative marks on your credit history, such as bankruptcy. If you haven’t had the chance to build a credit history, you will still qualify for federal loans.
• Discharge in the event of loss or disability: If you become permanently disabled, your federal student loan balance is automatically discharged. Loan discharge also occurs in the event of the student’s death, or the parent’s death if they took a parent PLUS loan.
• Generally less expensive: For most students, federal student loans are likely cheaper than private student loans. This is especially true for undergraduate students who don’t have a stable source of income or a long credit history.
• Access to student loan forgiveness: Federal student loans offer access to different loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. If you qualify for any of these programs, you could end up having tens of thousands of dollars in student loan debt forgiven once you meet the requirements.

Drawbacks of federal student loans

Despite the many benefits of federal student loans, there are important drawbacks to consider.

• Loan limits: Undergraduate students face borrowing limits, particularly first-year students, who can borrow the least. Some students may have to turn to private loans to cover what federal loans will not.
• Origination fees: Borrowers must pay an origination fee when they take out federal student loans. The fee is low for undergraduate students, but can be high for graduate students, professional students and parents.
• No choice of servicer: Federal student loans are managed by private servicers. Borrowers do not choose which servicer manages their loans. They can, however, consolidate their loans with a different servicer.

Private student loans

Private student loans are a type of unsecured loan used to cover higher education costs. They are issued by private lenders, such as banks, credit unions and online lenders. Unlike most federal student loans, borrowers must qualify for private student loans based on their creditworthiness. Students with no credit history or poor credit typically must apply with a cosigner to qualify.

There are different types of private student loans tailored to borrowers based on their major, credit score or whether they’re parents borrowing on behalf of their children. There are also loans for refinancing student loan debt. You’ll likely get the best rate and terms by applying for a loan designed for your needs.

Bankrate insight

Private student loans offer competitive rates for creditworthy borrowers. Still, the cost savings may not outweigh the benefits offered by federal student loans.

Benefits of private student loans

Although it’s best for most students to start with federal student loans, there are some advantages to using private loans if necessary.

• Higher loan amounts: Loan limits can vary from lender to lender, but you can generally get up to the total cost of attendance, giving you more borrowing power than with the federal government.
• Chance for low interest rates: If you’re a graduate or professional student or a parent, it is possible to get a lower interest rate through a private lender than through the federal government if you have excellent credit.
• No upfront fees: Private lenders typically don’t charge upfront loan fees on private student loans, giving you savings right off the bat.
• Loan terms are more flexible: The standard term for a federal student loan is 10 years, whereas private terms may be five to 20 years.

Drawbacks of private student loans

Private student loans can be a useful fallback when federal student loans don’t cover all of your expenses, but it’s useful to understand their downsides.

• Lack of borrower protections: Most private lenders do not offer an income-based payment option, and none offer loan forgiveness. While some private lenders offer forbearance plans, many do not.
• High interest rates: Borrowers with excellent credit can sometimes get better rates with private lenders, but borrowers with no credit or low credit scores will pay much more than they would with federal loans. They may also struggle to qualify.
• Must find your own loan: The burden is on you to research lenders, compare options, and apply with private student loan lenders. The FAFSA application streamlines applying for federal loans.

Federal vs. private loan: What type of student loan is best for me?

Whether you should get a federal or private student loan, or a mix of both, depends on your unique financial situation.

Federal student loans are the best option for most students and parents. They offer benefits like low, fixed interest rates and interest subsidies that make them more affordable. They also offer protections such as income-driven repayment plans that help keep students from falling behind on payments.

That said, there are times when private student loans are a solid choice. For example, if you’ve exhausted the federal student loan limit, private loans could finance the remainder of your education. Graduate and professional students who have a good credit score could potentially get a lower interest rate with a private lender. The same is true for parents borrowing on behalf of their children.

Ultimately, the best student loan for you comes down to your financial health, the amount you need to borrow for school and how quickly you anticipate paying back the loan. It’s equally important to consider borrowing costs, along with the repayment options available to you.

Bankrate’s student loan calculator can help you compare the cost of federal and private student loans, including estimating your monthly payments and the amount of interest you’ll pay in total. Similarly, the Bureau of Labor Statistics can help you estimate your starting salary after graduation. Together, this information can help you make more informed borrowing choices.

Bottom line

Federal and private student loans are two tools for financing your education. Federal loans carry more benefits for most borrowers, including lower rates, income-driven repayment plans and possible loan forgiveness. But with a good credit history, you may be able to save by using private student loans. In some cases, your best choice might be using both.

The important thing is to run the numbers, weigh the benefits of each and make an informed choice. 

Frequently asked questions

• Can I take out federal and private student loans?
  

  Borrowers can take out both federal and private student loans at the same time. This could make sense if federal loans are not enough to cover all of student’s educational expenses and private loans are needed to cover the difference.

  Be aware that some loan servicers handle both federal and private student loans. If you have a mix of both, you could end up with two types of loans managed by the same loan servicer.

• How do I know if my student loans are federal or private?
  

  To determine if your student loans are federal or private, check the Federal Student Aid website using your FSA ID. If they’re listed, they’re federal. If not, review your loan statements to see if they mention a federal program, or contact your loan servicer. For private loans, check your credit report to see all listed debts and lenders.