What Is the Difference Between Private and Federal Student Loans?

Both federal and private student loans can help you pay for college, but comparing the two can be challenging. Here are some key differences.

What are Federal Loans?

The government offers five different loans to help qualifying college students pay their expenses. While the loans are given through the school, these are federal programs.

  • Direct Subsidized Loans: Also known as Subsidized Stafford Loans, these are for undergraduate students with financial need. The federal government subsidizes some of the interest payments that these loans incur.
  • Direct Unsubsidized Loans: These are available for undergraduate, graduate, and professional students. It isn’t necessary to demonstrate financial need.
  • Direct PLUS Loans: This loan program is for parents of undergraduate students as well as graduate or professional students.
  • Direct Consolidation Loans: This is a new loan that consolidates all of your existing federal loans under a single umbrella.

In order to apply for a federal loan, students must file a FAFSA® for federal financial aid.

What are Private Loans?

Private loans are given through a bank or other financial institution. While they are still considered “student loans” when taken out for the purpose of paying for college, your eligibility is not determined by your school.

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The private lender will require a credit check. That means you’ll need good credit history to qualify for a loan at all, and great credit history to get a good interest rate. If you have an insufficient credit history you may need to recruit a cosigner, such as a parent or a grandparent, who agrees to pay off the loan if you are unable to do so.

Interest Rates

For private student loans, interest rates may vary widely from lender to lender. In general, however, private lender interest rates are higher than those for federal student loans.

Direct loans for undergraduate students carry an interest rate of 4.45%, while direct loans for graduate students carry a 6% interest rate. There is an interest rate of 7% for PLUS loans.

The interest rates on private loans vary from lender to lender and depend on the borrower’s credit score and history. They typically range from 5-12%.

Loan Amounts and Borrowing Limits

Federal Loan Limits

The most you can borrow under these programs is between $3,500 and $12,500 per year for undergraduate study, depending on your dependency status and college grade level. This table has the full breakdown:

LoanWho is eligible?Annual LimitAggregate Limit
Direct SubsidizedUndergraduates with demonstrated need$3,500 for freshmen; $5,500 for upperclassmen$23,000
Direct UnsubsidizedUndergraduates$5,500 for dependent freshmen; $12,500 for independent upperclassmen$57,500
Direct Unsubsidized for Graduate StudentsGraduate and Professional Students$20,500$138,500

PLUS loans do not have a specific annual and aggregate limit. Rather, they are limited only by the school’s cost of attendance.

Private Student Loans

Your age and credit history will also factor into how much money a private institution is willing to lend. Students without a significant credit history may need a parent or family member to cosign their loan, and some banks may limit the amount such individuals are allowed to borrow.

Most private lending institutions will set an aggregate undergraduate student loan limit between $100,000-$150,000, although it varies by institution. For graduate students, loan limits are typically between $150,000-$250,000, depending on your academic program and career path.