Earning a college degree can significantly enhance your career, but it’s not cheap — many students take on loans to pay for their education. According to the College Board, 50% of bachelor’s degree recipients graduated with student loan debt.
If you need to finance your degree, it’s essential to understand the two primary types of student loans: federal and private. Which type you use will affect your borrowing limits, repayment options, and overall loan cost.
Are federal or private loans better? In general, experts recommend exhausting federal loan options before turning to private loans. Although the Trump administration has made changes to federal financial aid, the recommendation to use federal loans first remains the same. However, for some borrowers, private student loans may be a more cost-effective option.
Federal student loans are offered by the U.S. Department of Education, and they make up the vast majority of outstanding education debt. In fact, federal loans account for more than 90% of the $1.77 trillion in national student loan debt.
Financial experts and organizations, such as the National Association of Financial Aid Administrators, the Consumer Financial Protection Bureau, and The Institute for College Access & Success, all stress the importance of exhausting all federal financial aid — including federal student loans — before turning to private loans. Why? They usually have lower interest rates than private loans, and the government provides more borrower protections and repayment options than private lenders.
For students and their parents, there are three different types of student loans available from the federal government:
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Direct Subsidized: These loans are available only to undergraduate students who demonstrate significant financial need. The government waives the interest that accrues while the student is in school, during the loan’s grace period, and during any periods of deferment.
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Direct Unsubsidized: Direct Unsubsidized loans can be used for undergraduate or graduate programs, though loans used for graduate school come with higher rates. The student is responsible for all interest that accrues.
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Parent PLUS: Parents can borrow money to pay for their biological or adopted child’s undergraduate education.
All federal loans have fixed interest rates, and all borrowers — regardless of their credit or income — qualify for the same rate on a given loan type.
Important: Grad PLUS Loans are a type of federal loan for professional and graduate students. However, the 2025 One Big Beautiful Bill (OBBB) eliminated this loan program. As of July 1, 2026, they will no longer be available.
Private student loans make up a small part — about 8% — of the overall student loan market. While the federal government issues federal loans, private student loans are provided by banks, credit unions, online lenders, and other financial institutions.
Although federal loans have fixed interest rates, private student loans can have either fixed or variable interest rates. Variable-rate loans typically have lower initial rates than fixed-rate loans, but the rates can change over time. Repayment terms on private education debt typically range from five to 15 years.
Students can use private student loans to pay for undergraduate or graduate programs. However, private loans are credit-based, meaning lenders have strict borrower requirements, and not everyone will qualify for a loan. Young college students typically don’t have the required credit to borrow yet, so parents or other loved ones often co-sign these loans.
Stuck with private student loans with high interest rates? Refinancing your private student loans could mean lower monthly payments and paying less interest overall.
When considering which type of student loans to use, consider these essential differences:
1. Annual and lifetime borrowing limits
Annual and lifetime borrowing limits differ significantly between federal and private student loans, with private loans offering higher maximums.
There are established caps on Direct Subsidized and Direct Unsubsidized student loans. Depending on your dependency status and the year of college you’re entering, the annual maximum ranges from $3,500 to $12,500 for undergraduate students and up to $20,500 for graduate students.
An aggregate or lifetime maximum also applies. It ranges from $31,000 to $57,500 for undergraduate students, and $138,500 for graduate students (that number includes all federal student loans you used for undergraduate study, too).
For Grad PLUS and Parent PLUS Loans, borrowers can borrow up to the total cost of attendance, as certified by the school.
However, the OBBB instituted new limits for loans issued on or after July 1, 2026. These limits will significantly impact graduate and professional students and parent borrowers. The table below highlights the new limits that will apply in the 2026-27 school year:
With private loans, lenders rarely have a fixed maximum. Instead, they allow students and parents to borrow up to the total cost of attendance for their program. Because their lending maximums aren’t as restrictive as federal loans, private loans are a useful option for borrowers who have reached the federal borrowing limits and need additional cash to pay for school.
2. Credit and income criteria
Federal loans are generally easier to qualify for than private loans. Federal student loans have no minimum income requirements, and Direct Subsidized and Direct Unsubsidized don’t involve credit checks at all.
Applicants for federal PLUS Loans will undergo a credit check, but the credit requirements are less intensive. Rather than looking for a specific FICO score or better, the government reviews your credit report to see if you have an “adverse” credit history, meaning recent major credit issues like foreclosure, vehicle repossession, or collections.
Requirements for private loans are stricter. Borrowers typically need to have established credit histories and a FICO score of 670 or higher, as well as meet minimum income requirements. If an applicant doesn’t meet the lender’s requirements, the only way to qualify for a private loan is to add a co-signer to their application.
3. Interest rates and fees
Federal loans always have fixed interest rates, and the rates for undergraduate loans tend to be low. They also have disbursement fees deducted from the loan when it is issued to you. These are the rates and fees for federal loans issued between July 1, 2025, and June 30, 2026:
Private loans can have fixed or variable interest rates, and they rarely have origination or disbursement fees. Rates vary by lender and whether the loan is used for undergraduate or graduate programs. We researched 20 leading private student loan lenders for undergraduate loans. As of August 2025, rates for variable-rate loans ranged from 4.19% to 18%, while fixed-rate loans ranged from 2.89% to 18%. Out of the 20 lenders we evaluated, none charged disbursement fees.
Important: Grad and Parent PLUS Loans have significantly higher rates than other federal loans. Borrowers with excellent credit may qualify for private student loans with lower rates, but keep in mind that private loans lack some of the benefits and protections of federal loans.
Federal student loans tend to be more generous in terms of in-school repayment than private lenders. Federal borrowers do not have to make payments while they’re in school or during their grace period, a period of six months after they graduate or leave college. Even though payments aren’t required, most federal student loans do accrue interest while you’re in school.
With private student loans, you might have to make payments while you’re in college. Private lenders typically have several in-school repayment options. Depending on the lender, you may be able to choose from the following plans:
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Immediate: As soon as the loan is disbursed, you begin making full principal and interest payments each month.
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Interest-only: After the loan is issued, you make monthly payments to cover the accrued interest while you’re in school. Once you graduate, the payments increase, so you also pay toward the principal.
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Fixed: With a fixed payment plan, you pay a specific amount, such as $25 per month, while in college. Once you graduate, the payments increase to cover the principal and interest.
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Deferred: If you opt for deferred repayment, you don’t have to make any payments until after you graduate. Because interest accrues during your time in school, the deferred payment plan has the highest overall repayment cost.
5. Repayment and hardship options after graduation
Where federal student loans really stand out is in borrower protection. Depending on your situation, you may qualify for the following options:
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If you’re sick or unemployed: If you become seriously ill or lose your job, you may be eligible for a federal deferment program. With these programs, you can postpone your payments for several months at a time.
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If you return to school: If you decide to return to school to earn another degree, you can defer your federal student loan payments until after you graduate from the new program or leave school.
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If your payment is too high: If you cannot afford the monthly payments under a standard 10-year repayment plan, you may be eligible for an income-driven repayment (IDR) plan. The payments are based on a percentage of your discretionary income, and some borrowers qualify for payments as low as $0.
However, the OBBB made changes to borrower protections. As of July 1, 2027, unemployment and financial hardship deferment programs won’t be available. For borrowers who take out new loans on or after July 1, 2026, the current IDR plans will not be available; you’ll only be able to choose from the new standard repayment plan and the new Repayment Assistance Plan.
Federal student loans are often eligible for loan forgiveness programs. For example:
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Public Service Loan Forgiveness: Borrowers may qualify for Public Service Loan Forgiveness (PSLF) and get up to 100% of their outstanding loans forgiven after meeting the program’s eligibility requirements. They must work for an eligible nonprofit organization or government office full-time for at least 10 years and make 120 qualifying monthly payments.
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Teacher Loan Forgiveness: Teachers who teach high-need subjects in low-income schools or education service agencies for at least five years can qualify for up to $17,500 of loan forgiveness.
Private student loans aren’t eligible for federal loan forgiveness programs like PSLF or Teacher Loan Forgiveness. But they may qualify for state-based loan repayment programs based on your employment, or for employer repayment assistance.
Although the OBBB made major changes to the federal student loan program, federal loans are still a good starting point for most students. Particularly for undergraduate students without established credit histories, federal loans give you a relatively low-interest way to pay for your education.
However, private student loans may have a role in completing your degree if you reach the federal annual or aggregate borrowing limits (or if you don’t qualify for federal student loans). Taking out a private loan could allow you to complete your program and earn a degree you otherwise wouldn’t be able to finish.
This article was edited by Alicia Hahn.
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