Federal loans and private loans

Where each kind of loan comes from

Federal student loans are made by the US Department of Education through the Direct Loan program. You apply for them by filing the FAFSA, and your school's aid office lists them on your aid offer. Most of them do not depend on a credit history, which matters when you have barely used a credit card.

Private student loans come from banks, credit unions, online lenders and a few state agencies. You apply to the lender directly, and the lender looks at your credit. Many students starting out need a cosigner, usually a parent or another relative, who becomes responsible for the debt if payments stop.

How the terms are set

Interest rates on new federal loans are set by law once a year and stay fixed for the life of each loan. Every borrower with the same type of loan in the same year pays the same rate, whatever their credit score. The new rates appear on studentaid.gov ahead of each award year.

A private lender sets its own rate, based largely on your credit and your cosigner's. That rate may be fixed or variable, and a variable rate can rise after you borrow. Fees, the length of repayment and what happens if you struggle to pay all differ from one lender to the next.

The protections that come with federal loans

Federal loans come with options for the years after school. You can choose a repayment plan tied to your income, pause payments through deferment or forbearance in some situations, and in certain cases have a loan discharged, for example if your school closes while you are enrolled. Some public service jobs can also lead to forgiveness under rules set by law.

Private loans may offer a few of these features, and some offer none of them. Each lender writes its own contract, so the only way to know is to read that contract before you sign. If federal loans are later refinanced into a private loan, the federal options are gone for good.

Choosing the order to borrow in

Many aid offices suggest using grants, scholarships, work and savings first, then federal loans, and a private loan only for a gap that remains. Private lenders usually ask your school to confirm your cost of attendance and other aid, so the aid office tends to see the request either way.

If a private loan is on your mind, talk with the aid office first. Staff there can check whether any federal amount on your offer is still unused, and whether a change in your circumstances is worth a review.