Federal vs. Private Student Loans: Key Differences

Student loans come from two very different places. Federal loans are made by the U.S. government under rules set in federal law. Private loans are made by banks, credit unions, and other lenders that set their own terms. The two can look similar on a financial aid offer, but the protections attached to them are not.

This guide is for students and parents deciding how to cover a gap after grants, scholarships, and savings. You will learn how each type works, how subsidized and unsubsidized federal loans differ, what recent changes mean for new borrowers, and why the usual advice is to exhaust federal options before turning to a private lender.

How federal student loans work

Federal student loans are issued through the Direct Loan program, and you apply by completing the FAFSA. Our guide on how to fill out the FAFSA walks through that form. The government sets the interest rate, which is fixed for the life of each loan, and rates for new loans are reset each year under a formula in federal law.

For loans first disbursed from July 1, 2026, through June 30, 2027, the rates published in the Federal Register are 6.52% for Direct Subsidized and Unsubsidized Loans for undergraduates, 8.07% for Direct Unsubsidized Loans for graduate and professional students, and 9.07% for Direct PLUS Loans. These rates change every year for new loans, so check StudentAid.gov for the figures that apply when your loan is disbursed.

Most undergraduates do not need a credit check for Direct Subsidized or Unsubsidized Loans. PLUS loans for parents do involve a credit review. Federal loans also come with annual and total borrowing limits, which vary by your year in school and whether you are a dependent or independent student.

Subsidized vs. unsubsidized

There are two main kinds of Direct Loans for students.

Direct Subsidized Loans are for undergraduates with financial need. The government pays the interest while you are enrolled at least half-time, during the grace period after you leave school, and during approved deferment. Graduate and professional students are not eligible.

Direct Unsubsidized Loans are available regardless of financial need, to undergraduates and graduates. Interest begins accruing at disbursement. If you do not pay it while in school, it can be added to the principal balance, which is called capitalization, and then you pay interest on a larger amount.

Here is a simple hypothetical. Say you borrow $10,000 at 6.52%. On an unsubsidized loan, simple interest accrues at roughly $652 a year. After four years in school, that could be more than $2,600 in interest before your first payment, and it may be capitalized. On a subsidized loan of the same size, the government covers that interest while you are in school. If you can afford to pay interest during school, doing so keeps the balance from growing.

How private student loans work

Private lenders set the rates, fees, and terms. Approval commonly depends on credit history, income, and sometimes the school or program. Many students have limited credit, so lenders often ask for a cosigner, someone who agrees to repay if you do not. A cosigner takes on real legal and credit risk, so that decision should be made with eyes open.

Private rates may be fixed or variable. A variable rate can start lower but can rise, increasing your payments. Private lenders usually offer fewer ways to lower or pause payments if your income drops, though some have hardship options. The Consumer Financial Protection Bureau (CFPB) summarizes the contrast this way: federal loans generally have fixed rates, income-based payment options, and possible forgiveness for public service, while private loans offer fewer ways to reduce or postpone payments.

If you take a private loan, ask the lender in writing about the rate type, all fees, whether interest accrues in school, what happens if your cosigner dies or the loan goes into default, and whether the cosigner can be released.

Side-by-side comparison

Recent changes to know about

Federal student loan rules changed in 2026. According to CBS News coverage, starting July 1, 2026, new borrowers can no longer take Grad PLUS loans, annual and lifetime borrowing caps apply to many graduate, professional, and parent borrowing, and borrowers who take out new loans on or after that date can choose between only two repayment plans: the Tiered Standard Plan and the Repayment Assistance Plan (RAP). Borrowers with older loans who take no new loans can keep certain existing plans, while PAYE and ICR are being phased out, and the SAVE plan is ending.

These rules are still being implemented, and some details depend on pending litigation, so confirm what applies to you on StudentAid.gov or with your school's financial aid office.

One practical consequence: for graduate and professional students and parents who hit federal limits, private loans may fill the gap. That makes comparing private offers more important, not less.

A sensible order for borrowing

1. Use free money first. Grants, scholarships, and work-study do not need to be repaid.
2. Accept subsidized loans next, if you qualify, then unsubsidized loans, up to what you need.
3. Consider a payment plan or part-time work before borrowing more.
4. Compare private loans only for the remaining gap, and get offers from several lenders.
5. Borrow less than the maximum. An aid offer shows what you can borrow, not what you should.

Do a repayment check before accepting any loan. Estimate your likely starting salary in your field, and compare it to the total you would owe. A common caution is to keep total borrowing below your expected first-year income, though that is a rule of thumb and not a guarantee.

Common mistakes

• Skipping the FAFSA and losing access to federal loans and grants.
• Accepting every dollar offered. Loans are not free money.
• Choosing a private loan for a low advertised rate without checking whether it is fixed, whether it requires a cosigner, and what protections you give up.
• Cosigning without a plan. The cosigner is equally responsible.
• Ignoring interest during school. Paying even part of it can reduce total cost.
• Not tracking your loans. Log in to StudentAid.gov to see your federal loans and servicers.

If you are weighing cheaper starting points, our guide to starting at a community college and transferring explains how that path can reduce how much you need to borrow.

Frequently asked questions

Should I always take federal loans before private loans?

In most cases, yes, because of fixed rates and repayment and forgiveness options. Private loans may sometimes offer lower rates to borrowers with strong credit or cosigners, but you give up federal protections, so compare carefully.

Can I refinance federal loans into a private loan?

Yes, but refinancing federal loans with a private lender generally means losing federal benefits such as income-driven repayment and forgiveness programs. That step is usually irreversible.

Do I need a credit check for federal loans?

Not for most Direct Subsidized or Unsubsidized Loans for undergraduates. PLUS loans for parents involve a credit review.

What if I cannot afford my payments later?

Contact your servicer right away. Federal loans have options such as income-driven plans, deferment, and forbearance, subject to current rules. For private loans, ask your lender about hardship programs.

Next steps

1. File the FAFSA and review your aid offers, separating grants and scholarships from loans.
2. Calculate the total you would borrow over your whole program and the estimated monthly payment.
3. Accept federal loans first, and borrow only what you need after counting other aid.
4. If you still have a gap, collect written offers from at least three private lenders and compare the rate type, fees, and cosigner terms.