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Key takeaways
- Federal student loans are offered by the federal government. Their low eligibility requirements and unique borrower protections make them the better option for most borrowers.
- Private student loans can help bridge funding gaps or offer better terms for professional or graduate students, as well as parents with strong credit.
- Some borrowers may require both federal and private student loans to cover all their college costs.
Students borrowing money for college typically have two options: federal student loans and private student loans. Federal loans are issued by the federal government, while private student loans are issued by banks, credit unions and online lenders.
With the passage of the Trump administration’s One Big Beautiful Bill (OBBB), major changes are coming into effect. The law brings updates to loan types, borrowing limits and repayment options – reshaping how students fund their education.
For most borrowers, federal student loans remain the smarter first choice – they’re easier to qualify for and offer more flexible support. But for students who’ve maxed out their federal aid or don’t meet eligibility requirements, private student loans can help fill the gap.
Federal vs. private student loans at a glance
| Key point | Federal student loan | Federal parent loan | Private student loan |
|---|---|---|---|
| When payments start | Six months after graduation (grace period) | Immediately unless deferment is requested | Varies by lender; some offer in-school deferment |
| Interest rates | 6.39%-8.94% (fixed) | 8.94% | 3.39%-17.99% (fixed or variable) |
| Subsidized | Yes, for undergraduate Subsidized Loans | No | No |
| Credit check | Not required (except for PLUS loans) | Required | Required |
| Tax benefit | Eligible for student loan interest deduction | Eligible | Eligible |
| Consolidation and refinancing | Available via Direct Consolidation Loan | Yes | Yes |
| Postpone payment option | Deferment and forbearance available | Deferment and forbearance available | Varies by lender |
| Repayment plan | Fixed, or income-driven (transitioning to RAP under OBBB) | Not after OBBB | No |
| Prepayment penalty | None | None | None |
| Loan forgiveness | Yes (PSLF, IDR forgiveness), though changing under OBBB | Not after OBBB | No |
| Where to get assistance | Federal Student Aid office or loan servicer | Federal Student Aid office or loan servicer | Through lender |
Federal student loans
Main features of federal student loans
- Fixed interest rates set by Congress that tend to be lower than most private loans, especially for those with no cosigner
- No credit check required (except for PLUS loans)
- Eligibility based on FAFSA, not creditworthiness
- Deferment, forbearance and loan forgiveness options
Federal student loans are issued by the U.S. Department of Education and come with several benefits that make them the first choice for most students.
Under the OBBB, the current variety of income-driven repayment (IDR) plans is being consolidated into a single program: the Repayment Assistance Plan (RAP). RAP adjusts monthly payments based on income and family size. Borrowers already on IDR plans must switch to RAP by July 1, 2028.
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4 types of federal student loans
- Direct Subsidized Loans: For undergraduate students with financial need. The U.S. government covers accrued interest on these loans while the student is in school and during deferment and grace periods.
- Direct Unsubsidized Loans: For undergraduate, graduate and professional students; not need-based. Students are responsible for all interest.
- Direct PLUS Loans: For graduate or professional students, or parents of dependent undergraduates. Eligibility is based on a credit check rather than need, and there is no dollar-amount cap. The cap is based on cost of attendance minus other financial aid received. Grad PLUS loans are being eliminated under OBBB.
- Direct Consolidation Loans: Consolidate multiple federal loans into one monthly payment.
Pros and cons of federal student loans
According to Bankrate principal writer and student loan expert Andrew Pentis, federal student loans and their “one-size-fits-all nature” offer flexibility to families “who couldn’t do better with a bank, credit union or other lender.”
“Federal loans are especially valuable if your income level qualifies you for subsidized loans, or if you’re planning a career that tracks to a federal forgiveness program,” says Pentis.
Unfortunately, the existing flexibility on federal loan repayment options is “significantly shrinking” because of the OBBB.
The good news is that it won’t happen overnight. If you’re already out of school and done borrowing, you’ll have a nearly three-year onramp into one of the surviving IDR plans, if you’re not already enrolled in IBR. The subtraction of deferment and forbearance options also only affects new borrowers.
— Andrew Pentis, student loan expert and principal writer
Benefits of federal student loans
- Income-driven repayment plans: Though IDR options are still available, starting July 1, 2026, new loans will be eligible only for RAP or the standard plan. Borrowers on current IDRs must switch by 2028.
- No or low credit requirements: Makes loans accessible for most students, especially since they might have limited credit histories.
- Loan discharge: Loans can be discharged due to death or permanent disability.
- Student loan forgiveness: Programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness are still available, though Parent PLUS loans will no longer qualify under OBBB. The Trump administration is also trying to restrict PSLF.
- New OBBBA benefits: Includes Pell Grants for workforce training and allows loan rehabilitations after defaulting twice.
Drawbacks of federal student loans
- Loan caps: New borrowing limits under OBBBA could lead students to seek additional private loans.
- Origination fees: Borrowers must pay an origination fee when they take out federal student loans. The fee is low for undergraduate students, but can be high for graduate students, professional students and parents.
- No choice of servicer: Federal student loans are managed by private servicers. Borrowers do not choose which servicer manages their loans. They can, however, consolidate their loans with a different servicer.
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Private student loans
Main features of private student loans
- Provides more options with repayment terms and interest rates
- A credit check is required, so a cosigner may be needed unless you already have a strong credit history
- A variety of products are available, especially ones tailored for specific graduate study
- Deferment and forbearance options may be available, but most likely interest will accrue during those periods
- Does not offer the same benefits as federal loans, such as loan forgiveness.
Private student loans are a type of unsecured loan used to cover higher education costs. They are issued by private lenders, such as banks, credit unions and online lenders. Unlike most federal student loans, borrowers must qualify for private student loans based on their creditworthiness. Students with no credit history or poor credit typically must apply with a cosigner to qualify.
There are different types of private student loans tailored to borrowers based on their major, credit score or whether they’re parents borrowing on behalf of their children. There are also loans for refinancing student loan debt. You’ll likely get the best rate and terms by applying for a loan designed for your needs.
Bankrate’s take:
Private student loans offer competitive rates for creditworthy borrowers. Still, the cost savings may not outweigh the benefits offered by federal student loans.
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Benefits of private student loans
- Higher loan amounts: Loan limits can vary from lender to lender, but you can generally get up to the total cost of attendance, giving you more borrowing power than with the federal government.
- Chance for low interest rates: If you’re a graduate or professional student or a parent, it is possible to get a lower interest rate through a private lender than through the federal government if you have excellent credit.
- No upfront fees: Private lenders typically don’t charge upfront loan fees on private student loans, giving you savings right off the bat. Note that federal student loans charge an origination fee of 1.057 percent for Direct Subsidized and Unsubsidized loans.
- Loan terms are more flexible: New borrowers under RAP will pay up to 10 percent of their adjusted gross monthly income under a 30-year repayment period. Borrowers who are transitioning from a previous plan will have 10, 15, 20 or 25-year fixed repayment terms.
Drawbacks to private student loans
- Lack of borrower protections: Most private lenders do not offer an income-based payment option, and none offer loan forgiveness. While some private lenders offer forbearance plans, many do not.
- High interest rates: Borrowers with excellent credit can sometimes get better rates with private lenders, but borrowers with no credit or low credit scores will pay much more than they would with federal loans. They may also struggle to qualify.
- Must find your own loan: The burden is on you to research lenders, compare options, and apply with private student loan lenders. The FAFSA application streamlines applying for federal loans.
Federal vs. private loan: What type of student loan is best for me?
Whether you should get a federal or private student loan, or a mix of both, depends on your unique financial situation.
| Choose federal loans if | Choose private loans if |
|---|---|
| You have no credit history or bad credit | You don’t qualify for federal student loans |
| You will qualify for student loan forgiveness | You have borrowed the maximum amount of federal student loans and need more |
| You want borrower protections after graduation as you start your career | You qualify for a better rate with private loans and anticipate stable income after graduation |
Federal student loans are the best option for most students and parents. As mentioned before, they offer benefits, such as the protections provided in income-driven repayment plans that help keep students from falling behind on payments.
That said, there are times when private student loans are a solid choice. For example, if you’ve exhausted the federal student loan limit, private loans could finance the remainder of your education. Graduate and professional students who have a good credit score could potentially get a lower interest rate with a private lender. The same is true for parents borrowing on behalf of their children.
Bankrate’s take:
Ultimately, the best student loan for you comes down to your financial health, the amount you need to borrow for school and how quickly you anticipate paying back the loan. It’s equally important to consider borrowing costs, along with the repayment options available to you.
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