Federal Student Loans Vs Private Student Loans Guide [2022]

Student loans have become an ingrained piece of American life. For better or for worse, almost 45 million adults currently hold student loans of some kind—with over 90 per cent of these originating from the federal government. 

Clearly, people are more inclined to borrow from the federal government as opposed to getting a private loan. There are a few reasons why it typically makes sense for students to go with federal loans before utilizing private ones.

Still, both kinds of student loans can have their place depending on the situation. Let’s look at the benefits of federal student loans versus private student loans. 

What Are the Advantages of Federal Student Loans?

As you now know, the vast majority of student loans are federal, as opposed to coming from a private lender. Generally speaking, federal student loans come with more benefits than private loans, which is why students seeking financial aid are encouraged to get all the federal funding possible before switching to private loans. 

Not all federal loans are the same. There are actually four general categories of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans. The first three of these are typical loans, while the final is a consolidation loan, which allows borrowers to combine several of their federal loans into a single new one.

Of the first three options, the first two are almost always going to be advantageous over private loans, while a Direct PLUS Loan might be a good candidate for a student loan refinance. We’ll look more at refinancing later when discussing private loans.

 When it comes to federal loans, these are a few of the advantages that typically stand out versus private loans:

1. Lower, fixed interest rates

At least for Direct Subsidized Loans, and some Direct Unsubsidized Loans, federal loans are going to come with lower interest rates than what can be found on the private market. Also, all federal loans come with fixed interest rates, which means the rate won’t change over time.

Some private loans have variable interest rates, which can fluctuate based on market conditions. This can lead to you unexpectedly having to pay more when rates change—potentially making the loan less affordable. 

2. Inherent repayment benefits

With most federal loans, borrowers will get certain benefits like income-driven repayment options, potential forgiveness, and even not having to pay interest until after graduation. Many of these desirable features won’t be available with private loans.

3. Not dependent on credit

With federal student loans, you typically aren’t going to need to prove any level of creditworthiness. This isn’t the case, however, with private loans, where lenders will expect you to have a solid credit score. 

It is clear there are some benefits to federal loans, which is why students are typically encouraged to max out their federal borrowing before moving on to private loans. Still, there are benefits to private loans versus federal ones—especially less ideal federal loans like Direct PLUS Loans. 

What Are the Advantages of Private Student Loans? 

Though they are generally not seen in as good of a light as federal loans, private student loans do have their advantages. Here are some of the benefits of private loans over federal loans:

1. You can refinance

There is no such thing as federal student loan refinances. If you want to refinance, it has to be done through a private loan.

But what is refinancing? It is a simple process of taking out a new loan that will pay off and replace an old one. This is beneficial if you are wanting to lower your interest rate, repayment term, or add or remove a co-signer. 

2. You can default on private loans

One of the more unflattering aspects of federal student loans is that they aren’t discharged even if the borrower files for bankruptcy. This isn’t the case, however, with private loans, which can be discharged when you go through bankruptcy. 

There are distinct advantages to both federal and private student loans. Knowing the benefits each type has over the other can help you decide what kind makes the most sense for your current situation.

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