Federal Vs. Private Student Loan – Which Is Better?

Higher Education is the first step to a fine career, but the ever-increasing college fees often put those beyond many families’ reach. With some financial crisis, you may not have enough savings to cover your or your child’s college education.

But that doesn’t mean the dream is gone! So, to fulfill the aspiration of higher education, what you need is a student loan of any nature.

Major Student Loan Options

There are two significant ways you can borrow money to help pay for college after you’ve explored scholarships and grants. One of them is a federal student loan, which the government offers for educational purposes. The other one is a private student loan, which banks and other online financial lenders provide.

Any student like you needs to be aware of the borrowing options beforehand. It will further aid in making smarter financial choices at the time of exigency.

To help you in that context a little more, here’s a comparative study between the two distinct loan options – you should evaluate both and pick the one that best suits your needs.

 Federal Student Loan

It is a Government administered borrowing option that can be classified into three unique categories, namely –

·        Direct subsidized loan

This kind of loan is precisely offered to students with exceptional financial needs. If you avail of this loan, the government will subsidize your interest on the loan while enrolled at least half-time.

In the case of a Direct Subsidised Loan, the Government does not charge any interest, and in addition, offers a six-month grace period after you leave the school before starting the repayment. Also, there won’t be any penalty included in case your loan repayment is deferred.

·        Direct unsubsidized loan

Students don’t need to be in an acute financial crisis to get hold of this unsubsidized loan. Independent students, in comparison to dependent students, can qualify for a higher amount of direct unsubsidized funds.

However, it includes interest. The total term of interest starts accruing from the day you receive the fund until the loan is repaid in full.

The Direct Unsubsidised Loan comes with a lot of attractive benefits, which are –

  1. No credit check
  2. A low fixed rate of interest
  3. Several flexible repayment plans
  4. No penalty for loan prepayment

Now that you know the benefits have a look at the downsides as well –

  1. Low loan limits
  2. The need to file a new FAFSA form every year to maintain eligibility
  3. Stricter limits on how you can use the money than with private loans


  • Direct PLUS loan

Designed for the parents of college students, Direct Plus Loan doesn’t require any proof of financial crunch. It has multiple appealing features, which include –

  1. possibility of borrowing the full cost of college
  2. relatively low, fixed rate of interest (but higher than the rates on other direct loan types)
  3. flexible repayment plans, such as the ability to defer payment until the student graduates

However, parents need to pass a full-proof credit check to avail of Plus Loan. Also, they need to reapply for funds each academic year, and they remain legally responsible for repaying the loan.

·        Direct consolidation loan

Last but not least is the Direct Consolidation Loan that the Government offers to the students to combine two or more running federal education loans into a single loan with a fixed interest rate. The rate of interest, in this case, is calculated based on the average rate of the loans you are consolidating.

Private Student Loan

Most students lean on federal loans considering it’s a Government-based funding system, but they are certainly not aware of the benefits that private student loans offer. While a federal loan can cover your education cost, there’s a limit in the borrowing amount of each year.

Private Student Loan is highly beneficial when the financial aid package offered by your college doesn’t meet your total cost of attendance. In addition, this loan system encapsulates quite a few benefits, such as –


  • Higher Borrowing Limits

You may not know that the Department Of Education caps the fund you can borrow through Federal Student Loan. It can make college fee payment difficult if you study in a high-esteemed expensive college for your graduation.

In comparison, private loans even allow you to borrow up to 100% of your education cost, including tuition, fees, and other college expenses. Isn’t this a lot more stress-free?


  • Relatively Lower Interest Rate

Recently, the Federal Reserve decided to take the edge off interest rates for private loans. As a result, the interest rate for student loans private in nature has cut short to nearly zero. And if your parents are availing the private loan in terms of Parent Loan, then the interest may be even lower than Federal Plus Loans.


  • Special Incentives Occasionally

Do you think the private loan is in demand only for low-interest rates and higher borrowing limits? No! There are other boons too. One such is the occasional incentive, or you may call it additional courtesies. For example, your lender may let you temporarily defer making payments if you lose your job or offer career counseling to help you find your next gig.


  • Can Save You When You Fail The Federal Loan Eligibility

Defaulting on a Federal Student Loan can make you ineligible for the next Federal Loan. The same may happen if you fail a bit in your academic progress, regardless of the issue behind it.

However, private lenders neither ask about academic progress while funding your education cost nor worry about your full-time enrollment in the college. They simply want your credit score is satisfactory. If you have a bad credit score, you’ll need a consigner to get the loan approved.

Federal Or Private Loan?

Both Private and Federal Student loans have their own set of pros and cons. However, the evaluation makes it clear that Private Student Loan is more liberal than the Federal one. In a Private Loan system, you can borrow the amount you want to cover your education cost, and that’s what most students look for.

So, before deciding, make sure you have thought wisely!

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