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Know before you borrow: Differences between federal & private student loans

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Tom Werner/Getty Images

As a parent of a college-bound student, you're excited for them to unlock the possibilities for better career options and personal growth. Given the cost of most programs, however, paying for that degree may involve leaning on financial resources beyond what's in your bank account.

When personal savings, grants and scholarships aren't enough to foot the bill, your student may need to borrow the rest. If so, they have two types of student loans to choose from: federal and private. Choosing the right one can bring more affordable payments and savings on interest charges.

Federal vs. private student loans: The basics

With federal loans, funds are provided by the U.S. Department of Education through the William D. Ford Federal Direct Loan Program. Private loans are offered through financial institutions like banks and credit unions or through other lenders. These two main loan types have other key differences as well:


Most federal loans for undergraduate students don't require a credit check, however Federal Parent Plus loans do require a credit check. Some federal Direct Loans require the student to demonstrate financial need while others do not. Private lenders, however, usually check credit scores when determining whether to lend money and at what interest rate. Since most undergraduate students have not established credit as young adults, private loans usually require a credit worthy co-signer.

Interest rates

For most borrowers, federal loans offer lower interest rates, depending on credit rating. However, there are exceptions. For example, if you, your student and/or a co-signer have excellent credit, you may find a more attractive rate through a private lender.

The interest on federal loans is fixed, so it won't increase or decrease based on economic conditions. While some private lenders offer fixed-rate loans, you'll generally have to pay a higher initial rate than with the variable-rate version.

Borrower protections

Federal student loans tend to offer more borrower protections than other loans. If your student has difficulty making payments, provisions in the Direct Loan program can allow them to qualify for a deferment or forbearance. Some private lenders offer forbearance in certain situations, but they tend to offer less flexibility.

Repayment plans

Federal loans have many different repayment plans, enabling your student to choose the one that best fits their financial situation. Certain plans provide loan forgiveness if a balance remains after 20-25 years, depending on when they took out the loan.

Loan limits

Despite their benefits, federal loans may not cover your student's full financing needs for college. For example, dependent undergraduates can borrow up to $5,500 during their first year, $6,500 for their second year and up to $7,500 for their third and fourth years. The majority of private lenders limit the amount that can be borrowed to the total annual cost of college attendance minus any other financial aid received.

Types of federal student loans

The Direct Loan program has four types of student loans. What's available for your student will depend on whether they're an undergraduate or graduate borrower and if they're already in repayment.

Direct Subsidized Loans

Direct Subsidized Loans, which are available to undergraduate students with financial need, do not accumulate interest while the borrower is in school. But there are limits on the amount of subsidized funds your student can receive. For instance, in their first year, dependent students are limited to $3,500 in subsidized loans. That limit increases to $4,500 in their second year and $5,500 in their third and fourth years. No credit check is required.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to undergraduate, graduate and professional students. Unlike Direct Subsidized Loans, the student does not need to show financial need to qualify. For undergrads, the fixed interest rate is the same as Direct Subsidized Loans (it's higher for graduate students), but interest accrues when the student takes out the loan, even if they're still enrolled in school. No credit check is required.

Direct PLUS Loans

Direct PLUS Loans are for graduate students or parents of dependent undergraduates. They carry slightly higher interest rates than Direct Subsidized and Unsubsidized Loans and require a credit check. Students can borrow up to the full cost of their college expenses minus any other financial aid received. Borrowers are not required to show financial need to qualify.

Direct Consolidation Loans

Direct Consolidation Loans allow borrowers to merge multiple federal student loans into a single loan, which can simplify the repayment process. The interest rate is the weighted average of existing loans, rounded up by one-eighth of a percentage point.

Thinking about how to pay for college costs?

Is your student hoping to enroll at a college or university but worried about how to pay for it? 
Learn how to cover education costs, even if they don't have grants or scholarships on the way.
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Applying for a federal loan

If your student plans to enroll in college classes in the upcoming academic year, they'll want to fill out the Free Application for Federal Student Aid (FAFSA) by the deadline. The income and assets your family reports will determine your Student Aid Index. This figure helps the Department of Education and individual institutions determine your student's eligibility for need-based grants, scholarships, work-study opportunities and federal loans.

After completing the FAFSA, the schools you named on the form will send a financial aid offer that lists all the assistance your student is eligible to receive. Keep in mind that you can choose to borrow all, just a portion or none of the loan amounts in the offer.

Applying for a private loan

Private student loans are available from a variety of banks, online lenders and credit unions to those who meet eligibility requirements. For example, Thrivent Credit Union provides options for student loans.

As with most large loans, applying with multiple lenders lets you choose among the best offers. Be sure to compare interest rates as well as any fees that will be charged and the repayment options.

In addition to traditional loans, you and your student may want to explore these other types of private student loans:

  • Degree-based loans. Some private lenders offer loans tailored to students in specific fields of study. Medical students, for example, may qualify for longer repayment plans.
  • State loan programs. While they're not technically "private" lenders, several states have loan programs for residents seeking to continue their education. These state-backed loans may have lower interest rates than other financing options.
  • International student loans. These can be a good option for foreign students studying in the U.S. who don't qualify for federal loans. A number of lenders offer loans specifically for international students, although they may need a co-signer who's a U.S. citizen.

Federal vs. private student loans at a glance

Federal student loans

Private student loans


U.S. Department of Education

Private lenders (e.g., banks, credit unions, online lenders)

Interest rate


Fixed or variable, depending on the lender and credit

Borrower protections

Deferment or forbearance may be available if you qualify

Deferment and forbearance options vary based on the lender and are usually more limited than federal loans

Repayment plans

Several options, including income-based plans

Varies based on the lender, but may include interest-only and extended repayment plans
Loan forgiveness
Options for certain borrowers in service fields (teaching, government, nonprofit and medicine) or if you have a total and permanent disability
Typically not available except in cases of death or permanent disability

Loan limit

Specific yearly limits for each loan type, which don't always cover the full cost of attendance

Loans may cover the full yearly cost of attendance less any other financial aid received, but lenders may have aggregate limits for undergrad and grad students

Choosing between federal vs. private student loans

For many borrowers, the combination of low interest rates and strong borrower protections makes federal loans a smart choice.

However, you may want to consider private loans if federal loans won't cover your student's full needs or if you, your student and/or a co-signer have an excellent credit history to leverage competitive interest rates. If interest rates have fallen since your student took out their original federal loan, there's also the option of refinancing with a private loan if a lower rate is available. Always consider what you give up in federal loans before replacing them with private loans.

Contact the lending experts at Thrivent Credit Union to discover options available for your path to paying for college.

Deposit and lending services are offered by Thrivent Credit Union, the marketing name for Thrivent Federal Credit Union, a member-owned not-for-profit financial cooperative that is federally insured by the National Credit Union Administration and doing business in accordance with the Federal Fair Lending Laws. Insurance, securities, investment advisory and trust and investment management accounts and services offered by Thrivent, the marketing name for Thrivent Financial for Lutherans, or its affiliates are not deposits or obligations of Thrivent Federal Credit Union, are not guaranteed by Thrivent Federal Credit Union or any bank, are not insured by the NCUA, FDIC or any other federal government agency, and involve investment risk, including possible loss of the principal amount invested. Must qualify for membership in TCU.