2 Types of Student Loans: Federal and Private Student Loans

There are many ways to help students who want to pursue higher education financially. These loans are obtained from commercial lenders, the government, or a combination. There are many different kinds of student loans, and some criteria that include financial necessity vary widely. The most frequent forms of student loans made available by the federal government are Federal Direct Subsidized Loans, Federal Direct Unsubsidized Loans, Federal Direct PLUS Loans, and Private Student Loans.

It’s important to understand the differences between these types of student loans and to carefully consider the terms and conditions before borrowing. 

1. Federal Student Loan Type

Type of Federal Student Loan Maximum Loan Limit Fees Interest Rate Requirements
Federal Direct Subsidized Loans $23,000 for dependent undergraduate students 1.057% 2.75% for loans disbursed between 7/1/2022 and 6/30/2023 Be enrolled in an accredited degree program at least half-time and show the financial necessity to be considered.
Federal Direct Unsubsidized Loans $23,000 for dependent undergraduate students; $46,000 for independent undergraduate students; $79,000 for graduate and professional students 1.057% 2.75% for loans disbursed between 7/1/2022 and 6/30/2023 Students must be enrolled in a degree-granting program at the 0.5 or higher time level. No proof of financial necessity is necessary.
Federal Direct PLUS Loans Cost of attendance minus any other financial aid received 4.228% 5.30% for loans disbursed between 7/1/2022 and 6/30/2023 Parent of a dependent undergraduate, graduate, or professional student.
Private Student Loans Depending on lender Varies by lender Varies by lender Depending on the financial institution, a cosigner with good credit and evidence of income or job is required.

Note: The interest rates and fees listed above are for the 2022-2023 academic year and are subject to change. It’s important to check the current rates and fees when applying for a student loan.

What are the different Types of Federal Student Loan Types?

Students interested in receiving financial aid to reduce the overall cost of higher education have access to several choices.

  • Federal Direct Subsidized Loans: Undergraduate students are eligible to apply for these loans, which are granted to borrowers depending on their level of financial need. The government pays interest on student loans during school and other deferral periods.
  • Federal Direct Unsubsidized Loans: These loans are not based on financial need and are offered to undergraduate, graduate, and professional students. The borrower is responsible for paying the interest on these loans, even while in school.
  • Federal Direct PLUS Loans: The parents of dependent students enrolled in undergraduate or graduate programs, and those working for professional degrees are eligible to apply for these loans. The borrower must pay the loan’s interest because the lender cannot do so.
  • Federal Private Student Loans: Banks, credit unions, and other private lenders offer these loans. The terms and conditions of these loans vary, so it’s important to shop around and compare offers before choosing a lender.

2. Private Student Loan Type

Private student loans are loans used to help pay for educational expenses and issued by private lenders, such as banks, credit unions, and other financial institutions. Private student loans are typically used to supplement federal student loans, which are often not enough to cover the full cost of tuition, fees, and other expenses related to higher education. It generally has higher interest rates than federal student loans and has less flexible repayment terms. It requires a cosigner, such as a parent or a guardian, and requires the borrower to have a good credit score. Private student loans are not typically eligible for the same forgiveness programs and income-driven repayment plans as federal student loans.

What are the different Private Student loans Type?

Here are some common types of private student loans:

  • Fixed-rate loans: A fixed-rate loan has a set interest rate throughout the loan’s term. It implies the borrower’s monthly payment won’t change. It is suitable for borrowers who want to know monthly payments and are fine with the risk of paying more in interest over time than with a variable-rate loan.
  • Variable rate loans: Fluctuating rate loans have variable interest rates and monthly payments. It is suitable for borrowers who are fine with changing monthly payments and anticipate interest rates to fall during the loan’s term, saving money on interest. Variable-rate loan payments climb if interest rates rise.
  • Cosigner release loans: A cosigner release loan is one in which the cosigner guarantees the loan but is subsequently freed from repayment obligations. Borrowers with a minimal credit history or poor credit ratings commonly utilize this loan.
  • Parent loans: These loans are designed to help parents pay for a child’s education and are made in the parent’s name.
  • Refinancing loans: Refinancing a loan is obtaining a new loan to pay down an existing debt or loan. Consolidating debt into one manageable monthly payment and reduced interest rate is a common reason for taking out a new loan.

Examine terms and conditions before picking a private student loan. Consider loan costs, repayment choices, and safeguards.

What is the difference between Federal Student Loan and Private Student Loan?

Federal and private student loans are two different types of student loans that are used to finance education. Here are some key differences between the two:

  • Funding source: Federal student loans are funded by the government, while banks, credit unions, and other financial institutions fund private student loans.
  • Interest rates: Federal student loans generally have lower rates than private student loans. The government increases federal student loan rates yearly. Private student loan interest rates vary greatly by the lender.
  • Repayment terms: The United States Department of Education (ED) provides a variety of flexible repayment alternatives for federal student loans. These choices include income-driven repayment plans and the flexibility to delay or lower payments under certain conditions. The repayment choices for private student loans are less flexible and provide a different range of safeguards if the borrower needs assistance completing payments.
  • Eligibility: Complete the Free Application for Federal Student Aid (FAFSA) and meet certain other eligibility requirements to qualify for federal student loans. Private loans have stricter credit and income standards and need a cosigner.
  • Default consequences: Defaulting on a federal student loan results in income garnishment and seizure of tax returns.

How to Determine whether the Federal Student Loan or Private Student Loan is Applicable?

Consider the following variables to decide between federal and private student loans:

  • Eligibility: Federal student loans are available to all students who meet certain eligibility requirements, regardless of their credit history or income. Private student loans have stricter credit and income requirements and require a cosigner. 
  • Interest rates: Federal student loans generally have lower rates than private student loans. It is because the government sets the interest rates for federal student loans and adjusts them annually. Private student loan interest rates, on the other hand, are established by the individual lender and are rather variable. 
  • Repayment terms: Federal student loans provide flexible repayment options, including income-driven repayment plans and the ability to postpone or reduce payments in certain circumstances. Private student loans have less flexible repayment options and do not offer the same protections if having trouble making payments. 
  • Fees: Federal student loans generally have lower fees than private student loans. Private student loans have origination fees, application fees, and other charges that increase the overall cost of the loan. Federal student loans are a better choice if trying to minimize borrowing costs.

Where to borrow money for a Student Loan?

There are several places to borrow money for a student loan, including the following:

  • Federal government: Both the Direct Loan and Federal Perkins Loan programs are available from the federal government. Submit a FAFSA to apply for these loans (FAFSA).
  • Private lenders: Private lenders make student loans to banks, credit unions, and other financial organizations. Private student loans are a non-need-based alternative to government loans. The loan terms and conditions vary by lender but usually demand repayment with interest after graduation or leaving school. Compare offers from multiple lenders to discover the best private loan.
  • School: Some schools have financial aid programs and offer student loans to help cover the cost of tuition and other expenses. These loans are offered by the school itself or through a private lender.
  • State government: Some states offer student loan programs to help residents pay for college. These programs have different eligibility requirements and terms than federal student loans.

How Much Can a Student borrow for a Student Loan?

Student loan amounts vary on degree level, enrollment status, and financial necessity. Here are some common student loan borrowing guidelines:

  • Federal student loans: Undergraduates borrow up to $5,500 to $12,500 per year, depending on their year in school and whether they are dependent or independent students. Students in graduate and professional programs borrow up to $20,500 each academic year. The total amount allowed to borrow through the Direct Loan program is capped at $58,000 for undergraduate students and $138,000 for graduate and professional students.
  • Private student loans: The amount to borrow with private student loans depend on the lender and creditworthiness. Private student loan lenders consider income, credit score, and debt-to-income ratio when determining how much to borrow. Some lenders require a cosigner.

It’s important only to borrow what is needed to finance education and to be mindful of the total amount of debt. Consider future earnings potential and abilities to repay loans before borrowing a large amount.

What are the Terms of Payment for such Types of Student Loans?

The payment terms for student loans depend on the loan type and the lender. Here are some common payment terms for different types of student loans:


  • Federal student loans: Federal student loans generally have a fixed interest rate and a repayment term of 10 to 25 years, depending on the type of loan and the repayment plan. Choose a repayment plan based on income, or postpone or reduce payments if having financial hardship.
  • Private student loans: Private student loans have a fixed or variable interest rate, and the repayment term is as short as five years or as long as 20 years. The repayment terms for private student loans depend on the lender and the loan terms. 

What is the best type of student loan for college students?

Federal Direct Plus Loans are the best student loan for college students. Students in graduate and professional programs and the parents of undergraduate students with dependent children are eligible for these loans. PLUS loans feature higher interest rates than Stafford Loans, but no annual or overall debt restrictions are associated with these loans.

Which type of Student Loan is good for Students with Bad Credit?

A federal student loan is a good option for students with bad credit. Federal student loans are available to all students who meet certain eligibility requirements, regardless of credit history or Income. 

Private loans have tighter credit, income, and cosigner restrictions.  A cosigner with strong credit helps receive a private student loan if one’s personal credit history gets denied for loan approval. Enhance credit history if having problems acquiring a student loan. It includes paying on time, lowering debt, and avoiding additional credit. Improving credit scores helps one get a student loan with a cheaper interest rate.

Which Type of Student Loan is best for Undergraduates Students?

Federal Direct Subsidized Loans are best for undergraduate students. These grants are available to undergraduates and dispersed to recipients based on demonstrated financial need. The federal government covers the cost of the interest accruing on student loans while the borrowers are in school or during other deferral periods. Total Direct Loan eligibility for undergraduates is limited to $57,500.

Which Type of Student Loan is best for Students in Graduate Schools?

Federal Direct Unsubsidized Loans are best for students in graduate school. A result is that Federal Student Loans provide more lenient repayment periods and cheaper interest rates than private student loans. Graduate students might explore institutional loans or private student loans if federal loans are inadequate.

Graduate and professional students borrow up to $20,500 annually through the Direct Loan program. The total borrowable amount is capped at $138,500 for graduate and professional students.

Is a student loan only available to students?

Student loans are generally designed to help students finance higher education. However, there are situations where people who still need to enroll in school but want to pursue an education apply for and receive student loans.

Some student loan program examples are available to individuals seeking professional certifications or returning to school after a break in enrollment. The applicant must be able to show financial necessity and have a high school diploma or equivalent to be considered for these positions.

Do you need a cosigner for Student Loans?

No, a cosigner is generally not required for federal student loans. Federal student loans are available to all students who meet certain eligibility requirements, regardless of their credit history or income. Borrowers need a cosigner to qualify for a private student loan if having a limited credit history or a low credit score. 

Are Student Loans worth it?

Yes, it is worth it. Student loans are useful tools for financing higher education, but it’s important to carefully consider whether taking on student loan debt is worth it. Here are some things to consider when deciding whether student loans are worth it:

  • Affordability: Student loans help pay for tuition and other school expenditures, but interest and fees raise the total cost. It’s important to carefully consider the budget and ability to repay the loans before borrowing a large amount.
  • Future earnings potential: Higher earnings potential with a college degree, but be realistic about wages after graduation. Consider the expense of schooling if pursuing low-paying employment.
  • Other financing options: Explore other financing options, such as grants, scholarships, and work-study programs, before taking out student loans. These options are more affordable than student loans and must not be repaid.
Personal Finance Writer at Payday Champion

Kathy Jane Buchanan has more than 10 years of experience as an editor and writer. She currently worked as a full-time personal finance writer for PaydayChampion and has contributed work to a range of publications expert on loans. Kathy graduated in 2000 from Iowa State University with degree BSc in Finance.

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