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Federal vs Private Student Loans: Which Should I Apply for and Why?

Another year passes and student tuition is still on the rise. In the period from 2008 to 2020, tuition increased by nearly 65%. Unfortunately, 40% of American students are turning their down their first choice for college due to the rising costs.

A growing number of Americans are turning to student loans to help pay for college. In fact, over 44 million Americans are currently holding student loan debt. The grand total of this debt has surpassed $1.5 trillion.

One decision that college students need to make is whether to use public or private loans. Read on for a comprehensive guide on federal vs private student loans. This guide will help you decide which loan to apply for and why.

What Are Federal Student Loans?

Federal student loans are often referred to as public loans. They are issued by Sallie Mae and guaranteed against default by the U.S. federal government.

College students can apply for federal loans by submitting a Free Application for Federal Student Aid (FAFSA). The FAFSA takes a look at your income to determine what type of aid you qualify for. There are other eligibility criteria such as investments, number of dependents, and disabilities.  

Students may be eligible for federal grants or loans. Federal grants, such as Pell Grants, do not have to be paid back.

Other types of assistance include subsidized or unsubsidized loans. Of the two loan types, subsidized loans are far more attractive because the federal government pays the accrued interest. Unsubsidized student loans are very similar to those offered by the private industry.

What Are the Advantages and Disadvantages of Federal Student Loans?

Federal student loans have some advantages and disadvantages. Continue reading for more details about the pros and cons.


The government allows a lot of flexibility in the application and repayment of the loans.

Your credit score is not a factor in the loan application. In addition, federal loans do not require a co-signer.

They also offer various repayment options to help students. For example, students can choose an income-based repayment plan.

Here, the government calculates your monthly repayment amount based on how much money you earn. This gives students time to find a career and start earning a higher salary before paying back the bulk of the loan.

There are also loan forgiveness options for people who serve in the public sector. Federal loans have guaranteed cancellation in the event that the borrower dies.


There are also disadvantages to federal student loans. The best loan options are reserved for people who meet the government’s eligibility criteria. You will need to fill out the FAFSA on an annual basis to get new loans.

The government also highly regulates the student loan industry. Borrowers have very little flexibility in how they use the funding. The Department of Education is very specific that loans must be used on tuition and room and board.

In addition, loan amounts are limited due to this restriction. You may not get enough money to cover your financial needs.

There are also limits on federal loan consolidation solutions. For instance, you can only consolidate federal student loans. The government does not allow you to fold in a state or private loans into your consolidation package.

What Are Private Student Loans?

Private student loans are an increasingly popular option for college students. You can secure a private student loan from a variety of sources. Student loans are offered by banks, credit unions, and other financial institutions.

Unlike the federal student loan process, you do not have to fill out the annual FAFSA to secure financing. Instead, you can apply for a private student loan at any time.

What Are the Advantages to Private Student Loans?

There are many advantages to pursuing private student loans to pay for your college needs. Flexibility is commonly cited as one of the most impactful benefits of private loans.

You can secure larger credit lines under a private loan. You do not have to complete a FAFSA and your loan eligibility is not based on the government’s criteria. This means you will not be restricted because your parents make too much money to secure assistance.

Along these same lines, private student loans do not place fewer restrictions on how you spend the money. Therefore, the loan does not need to be used strictly for tuition and boarding.

You can fold in other indirect expenses like transportation and supplies. For example, you may need to buy a laptop to support your studies. A federal student loan will not cover this, while the private option will.

Lastly, interest rates are at or near record lows nationwide. This means that you can secure a low-interest rate on a private student loan. This was an area where public loans had the advantage in the past, but now private options are on par.

Can You Consolidate Private Student Loans?

To reduce costs, many students opt to consolidate their student loans. It also makes it easier to manage multiple loan accounts by bundling under one consolidation package.

There is a public consolidation package, but it is extremely limited. You can only consolidate federal student loans. These options do not allow you to fold in loans given by state governments.

Under a private consolidation solutions, you can bundle together any type of student loan. This includes federal, state, and private loans.

In some debt consolidation packages, you can even bundle in other loan types. This includes major debt drivers like medical bills and credit cards.

You are not going to find this type of flexibility in the public sphere. The bottom line is that federal loans are heavily regulated and have tight restrictions.

A Recap of Federal vs Private Student Loans

Taking on debt as a college student is more likely than not. You may need to exhaust every possible loan option to pay for the rising costs of tuition.

College costs are beyond your control, but how you pay for it is still in your hands. Private student loans may be exactly what you need to cover all of your expenses.

If you want to learn more about federal vs private student loans, contact us today to speak with a specialist.

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