July 3, 2019

Deciding Between Federal and Private Student Loans

Written By Mary Beth Eastman
Last updated November 22, 2019

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When it’s time to pay for your college tuition and other fees, it can get a little tricky deciding the best student loans to use. But if you want to choose the right loans for you, it’s important to consider the pros and cons. Here’s what you should know:

There are several benefits and pitfalls to take into account when choosing a federal student loan to cover your education costs. Here are a few essential factors to consider:


  • Fixed interest rates. Federal loans provide fixed interest rates, which can provide a consistent rate you can expect that saves you money over the life of your loans.
  • Subsidized loan options. Subsidized loans don’t accrue interest while you’re in school or on a qualified deferment.
  • Various repayment options. Federal student loans provide several repayment options, including income-based repayment (IBR). You may even qualify for a student loan forgiveness program that removes your obligation for paying your federal student loans.


  • Income tax for some loan forgiveness programs. If you apply for loan forgiveness under income-based repayment plans, such as IBR or PAYE, you may be responsible for paying taxes on any forgiven amount of the loan.
  • Loan limits. You can only borrow up to a specified amount based on your dependent status, school year, school and loan type. For instance, graduate students can borrow up to $20,500 of unsubsidized loans per year. However, first-year dependent undergraduate students have an annual loan limit of $5,500, including $3,500 of subsidized loans.
  • No bankruptcy discharge. Even if you file bankruptcy, you must still repay your federal student loans. That’s because the government does not allow discharging of this type of debt under Chapter 7 or Chapter 13 bankruptcy.

It’s critical to assess the advantages and disadvantages of private loans before making a commitment. Consider these private student loan benefits and drawbacks:


  • Lower interest rates for excellent credit. If you have excellent credit, you may get interest rates lower than federal student loan interest rates.
  • Higher loan amounts. You may qualify for a higher loan amount with a co-signer who has good credit. That’s because private student loans are not based on your need.
  • Immediate access to loans upon approval. Most private student loans give you access to funds right away, unlike federal student loans that may require a waiting period.


  • Typically higher interest rates. Since private loans typical offer variable interest rates that can increase over time, your debt may cost more than if you used federal loans with fixed interest rates.
  • No forgiveness. There are no forgiveness programs that can wipe out your private student loans.
  • Credit matters. Your credit impacts your eligibility to receive private student loans and your interest rate. Thus, applicants with low credit scores may not have favorable interest rates or may require a co-signer.

Whether you opt for federal loans versus private student loans, it’s important to evaluate your needs. Consider your current financial situation and choose the best loans that help you achieve your goals. Remember that in the future you may wish to refinance your student loans to take advantage of interest rates; use that as a factor in your decision. Here are a few of the best student loan refinancing companies that perform this service.

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