What is the Difference between Federal and Private Student Loans?

on May 22, 2017

The most obvious difference between federal and private student loans is in the source of funds.

 

The federal government makes federal student loans, while banks, credit unions, non-bank financial institutions, state loan agencies and colleges and universities make private student loans.

 

There are other important differences that affect the cost, eligibility and repayment terms of the loans.

 

Differences in Cost of Federal and Private Student Loans

 

Characteristic

Federal Stafford Loan

Federal PLUS Loan

Private Student Loan

Interest Rates

Fixed

Fixed

Fixed and/or Variable

Index Rate

10-Year Treasury Note

10-Year Treasury Note

1M and 3M LIBOR

Prime Lending Rate

Loan Fees

About 1%

About 4%

None

Tax Deductible Interest

Yes, up to $2,500

Yes, up to $2,500

Yes, up to $2,500

Auto-Debit Discounts

0.25% interest rate reduction

0.25% interest rate reduction

0.25% or 0.50% interest rate reduction

Discounts for Making Payments during the In-School Period

No

No

Varies by lender, up to a 1% interest rate reduction

Subsidized Interest

Depends on financial need. Available during in-school, grace and deferment periods

No

No

 

Borrowers should shop around for the best interest rates available to them. Although the interest rates on federal student loans are set by law, the interest rates on private student loans are set by each lender.

 

Differences in Eligibility of Federal and Private Student Loans

 

Characteristic

Federal Stafford Loan

Federal PLUS Loan

Private Student Loan

Borrower

Student

Grad PLUS (Student)

Parent PLUS (Parent)

Student and/or Parent

FAFSA Required

Yes

Yes

No

Credit Check Required

No

Yes. Borrower must not have an adverse credit history.

Yes. Eligibility and interest rates depend on credit scores, annual income, and debt-to-income ratios.

Cosigner Required

No

Usually no. Endorser may be required if borrower has an adverse credit history.

Yes. More than 90% of loans to undergrads and 75% of loans to graduate students require a creditworthy cosigner.

Free FICO Scores

No

No

Varies by lender

Annual Loan Limits

Dependent: $5,500 to $7,500

Independent: $9,500 to $12,500

Graduate School: $20,500

Medical School: $40,500

COA – Aid

COA – Aid

Cumulative Loan Limits

Dependent: $31,000

Independent: $57,500

Graduate School: $138,500

Medical School: $224,000

None

Varies by Lender

 

 

Differences in Repayment Options for Federal and Private Student Loans

 

Characteristic

Federal Stafford Loan

Federal PLUS Loan

Private Student Loan

Repayment Term

10-30 years

10-30 years

5-15 years typical

Some offer 20 or 25 years

Income-Driven Repayment

Yes

Grad PLUS (Yes)

Parent PLUS (No)

No

Forbearances

3 years max

3 years max

1 year max

Partial Forbearance (Interest-Only Payments)

No

No

Varies by lender

Death and Disability Discharges

Yes

Yes

Varies by lender

Public Service Loan Forgiveness

Yes

Grad PLUS (Yes)

Parent PLUS (No)

No

Grace Period

6 months after graduation or drop below half-time enrollment

6 months after graduation or drop below half-time enrollment

6 months after graduation or drop below half-time enrollment

Prepayment Penalties

None

None

None

Penalties for Default

Administrative wage garnishment (without court order)

Offset income tax refunds

Garnish Social Security disability and retirement benefit payments

Administrative wage garnishment (without court order)

Offset income tax refunds

Garnish Social Security disability and retirement benefit payments

Court order required for wage garnishment

Cannot offset income tax refunds

Cannot garnish Social Security benefit payments

Statute of Limitations

No

No

Yes. Varies by lender, typically 3-10 years

Bankruptcy Discharge

Rare

Rare

Rare

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