A 2019 study showed that most Americans live with some financial regret. One of the highest-ranked regrets was related to choices surrounding student loans.
Trying to figure out the difference between student loan options will leave you with gray hair by age 25. The truth is, there are tons of different options available, and it’s incredibly important to understand the differences to make the best decision for your education. The best place to start is understanding the differences between federal and private student loans.
So take a deep breath, and don’t worry. No gray hairs here. We’ll give you everything you need to know.
Who Issues the Loan?
Federal
The federal government issues these loans. Federal tax dollars paid by US citizens each year fund federal student aid programs
Private
Banks and other financial institutions issue private student loans.
Who is Eligible for the Loans?
Federal
In order to become eligible for federal student loans, you must meet the following requirements:
- Demonstrate financial need: Financial need is calculated by taking the difference between the cost of attendance (COA) at a school and your Expected Family Contribution (EFC). While COA varies from school to school, your EFC does not change based on the school you attend.
- Be a U.S. citizen or eligible noncitizen: some legal U.S. residents without citizenship may qualify.
- Have a valid Social Security number: with the exception of students from the Republic of the Marshall Islands, Federated States of Micronesia, or the Republic of Palau.
- Be registered with Selective Services: if you’re a male (you must register between the ages of 18 and 25).
- Be enrolled or accepted for enrollment in an eligible degree or certificate program: You are not eligible to borrow federal loans unless you attend an eligible program.
- Be enrolled at least half-time to be eligible for Direct Loan Program funds: most programs require you to be enrolled at least half-time.
- Maintain satisfactory academic progress in college or career school: You must meet the standards for satisfactory academic progress toward a degree or certificate offered by your institution. Check with your school to find out its standards.
- Complete and sign the Free Application for Federal Student Aid (FAFSA) form: FAFSA is used to determine your financial need.
- Show you’re qualified to obtain a college or career school education: You must have a high-school diploma or a recognized equivalent such as a General Educational Development (GED) certificate.
Private
Not everyone will qualify for private student loans. Private lenders evaluate applicants based on a variety of factors, typically including the financial history and credit history of the applicant and/or the cosigner (if applicable). If the private lender deems you to be too risky of a borrower, they may not issue you a loan.
Applying with a cosigner who has a strong credit score could improve your chances of qualifying and allow you to access lower interest rates.
How Much Can You Borrow?
Federal
The amount you can borrow in federal loans depends on your student status.
Undergraduate students can borrow between $5,500 and $12,500 maximum in Direct Subsidized and Direct Unsubsidized loans each academic year.
A parent can also borrow a maximum of $20,500 in Direct Unsubsidized Loans per academic year via a Direct PLUS Loan.
Graduate/professional students can also borrow a Direct PLUS Loan, however, the amount varies from person to person depending on the cost of attendance at their respective institution and the financial aid they received.
To see how much money you can receive in federal loans, you will need to fill out the Free Application for Federal Student Aid (FAFSA). This is essentially an application that gives the federal government an idea of your expected financial need.
Private
The amount one can borrow in private student loans varies by lender. Typically, borrowers are able to fill the remaining balance they owe after accepting scholarships and/or federal loans with private student loans. Regardless, the amount you borrow from any private lender cannot exceed the total cost of attendance at your institution.
What are the Interest Rates?
Federal
Congress sets the interest rates on federal student loans. The rates vary based on the loan type and the disbursement date of the loan (the date the funds are paid to the student or school directly).
The table below provides interest rates for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans first disbursed on or after July 1, 2021, and before July 1, 2022.
| Loan Type | Borrower Type | Fixed Interest Rate |
| Direct Subsidized Loans & Direct Unsubsidized Loans | Undergraduate | 5.50% |
| Direct Unsubsidized Loans | Graduate or Professional | 7.05% |
| Direct PLUS Loans | Parents & Graduate or Professional Students | 8.05% |
All federal student loans have fixed interest, meaning that the rate will not fluctuate for the life of the loan. Perkins Loans (regardless of the first disbursement date) have a fixed interest rate of 5%.
If your loan was disbursed before July 1, 2023, you likely have a different interest rate.
Private
The interest rate on private student loans is based on a variety of factors. Most private lenders look at your financial history and credit score to assess the risk you pose as a borrower, which is reflected by the interest rate they offer you.
The lower your credit score, the more risk you present as a borrower — this means a higher interest rate. Similarly, the higher your credit score, the less risk you present as a borrower — this leads to a lower interest rate.
Unlike federal student loans, private student loan interest rates can be fixed or variable. You can use Sparrow to compare real interest rates from more than 15+ different lenders to ensure you’re getting the best rate possible.
When Do I Have to Start Paying the Loan?
Federal
Federal loans will go into repayment if you graduate, go below part-time student status, or leave school entirely. If you have a Direct Subsidized, Direct Unsubsidized, or Family Educational Loan, you will have a 6-month grace period before you are required to make consistent payments.3
It is important to note that Direct Unsubsidized loans and PLUS loans will accrue interest while you are in school. Direct Subsidized loans will not accrue interest while you are in school. So, while payments won’t be required until after the grace period, interest may be accruing depending on the loan type.
Private
Private loans typically don’t require consistent payments until after you leave school. Most lenders will implement a similar grace period to federal student loans, usually around 6 months after graduation. However, private student loans will accrue interest while in school, starting immediately after disbursement.
Is There an Advantage of One Over the Other?
| Federal Loans | Private Student Loans | |
| Pros | 1. Typically don’t require good credit or a cosigner. 2. Come with additional benefits such as loan forgiveness programs and income-driven repayment options. 3. Interest rates tend to be lower than private loans. | 1. Higher borrowing limit, up to 100% of the cost of attendance 3. You can apply online in a couple of minutes 2. Lowest interest rates on the market, if you have excellent credit. |
| Cons | 1. There is a cap to how much you can borrow in federal student loans. 2. Not all students will qualify for subsidized student loans. | 1. You may need a cosigner to qualify for a private student loan. 2. Not accessible to borrowers who lack a strong credit score or creditworthy cosigner |
Final Thoughts
There’s a lot to understand about federal and private student loans, but the good news is that if you’ve made it to this point in the article (shoutout to you!) you’re already one step closer to making an educated decision when it comes to your loans.