Types of Student Loans Explained: Federal vs. Private

Need to borrow money for college? Then it's time to learn about federal and private loans. See what loans are available and the differences between them here.

With even a semester of community colleges costing thousands of dollars these days, college affordability often makes a big difference in where students are able to go. Luckily, you can usually bring those costs down with federal aid and scholarships. And when you need to fill in the (reasonable) gaps, there are several higher education loan options out there to help you pay your college bills. But before you sign on the dotted line, it helps to know the differences between these loan options—especially because federal student loans and private student loans are very different animals. Here’s an explanation of the types of student loans you might encounter out in the wild.

Federal loans

First things first: to qualify for any federal student loan aid, you must fill out the Free Application for Federal Student Aid (FAFSA) every year. The FAFSA gives the government an understanding of you and your family’s income, expenses, and projected college costs. It then uses that information to determine how much federal aid you’ll qualify for. The FAFSA is free, but you have to meet deadlines. You should submit your completed FAFSA ASAP after October 1 each year using the previous year’s tax returns.

Using information from the FAFSA, the US government issues different types of federal loans. You can't request one loan over another, but you'll find out what you're eligible for on the financial aid award letter that comes from colleges that accept you. Also keep in mind that there is a maximum on how much you can borrow in federal loans each year; you’ll find the breakdown here. For example, if you’re a first-year dependent student, you can only borrow up to $5,500 in federal student loans for your first year of college; this includes subsidized and unsubsidized loans (keep reading the find out the difference!).

Here’s a look at the main types of federal student loans available to college students.

Direct Subsidized Loans

These loans are for students with demonstrated financial need. They accrue interest at a fairly low rate (as of January 2017, the interest rate is 3.76%). But “subsidized” means that the government—not you, the student—pays all the interest that accrues during the time you're in school. That can save you and your family a lot of money in the long run. Also, as with many other federal loans, the interest rate is fixed, meaning it won't change over the life of the loan, which is especially great if you lock it in at a low rate. But since you have to apply for a new loan every year, the rate you get on your freshman year loans probably will be different from the rate on your senior year loans.

Related: What You Need to Know About Taking on Student Loans

Direct Unsubsidized Loans

Unsubsidized loans aren’t based solely on financial need. They’re useful if you just don't have quite enough money on hand to pay for school but don't qualify for financial need by government guidelines. While unsubsidized loans still have preferable low interest rates, you're responsible for paying the accruing interest, which increases the overall loan payback amount.

Direct PLUS Loans

If your loans aren't enough to cover your need, your parents can take out PLUS loans to cover education costs (graduate students can also qualify for these loans on their own). Also, the interest rate is higher (as of January 2017, the interest rate is 6.31% fixed).

Federal Perkins Loans

Federal Perkins Loans are excellent choices for students with great financial need. These loans have a fixed 5% interest rate, and you can borrow up to $5,000 each year. However, not all colleges participate in this program, so check with your school. Finally, you can also get a Direct Consolidation Loan (probably after you graduate) that lumps all your existing loans into one payment. You can learn more about the existing federal student loans on the US Federal Student Aid website.

A note about federal work-study

Some students also qualify for federal work-study from their college, which seems like a loan but is more of an award. Work-study is a program in which a student can work at a designated campus job (students must secure these for themselves) and get a paycheck for the work. The amount is considered financial aid, but the family is required to pay the money upfront as part of their college bill. As the student earns the paycheck up to the total amount, the student/family decides how the money is spent, whether it’s to pay tuition or as spending money.

Private loans

Private loans through banks or private lenders (like Sallie Mae) help families bridge the gap between federal aid and what they need to actually pay their tuition bill. Private loans can vary dramatically in terms, from their interest rates to repayment schedules. Typically, private loans have higher interest rates, require a parent or guardian to cosign the loan, and sometimes require payments as soon as the first payment is made to the school. Though you can certainly get private student loans for reasonable rates, in general, they should be seen as a “last resort” after exhausting all your federal student loan options. This is because federal student loans typically have more protections for students, like fixed interest rates and sometimes even loan forgiveness programs.

Related: How Do Federal and Private Education Loans Differ?

Student loans can be helpful in paying for college, but they’re not something to take lightly. Before taking out any loans, be sure to learn all you can about what borrowing entails. And whether you’re getting federal or private student loans, you shouldn’t borrow more than you can afford to pay off with your first entry-level salary. In general, that shouldn’t be more than 8% of your gross pay. For example, if you earn $40,000 a year in your first job out of college, you don’t want to have more than about $23,000 total in student loan debt. Otherwise, your student loan payments are going to cut into the money you need to pay for housing, your car, food, and just living your life.

Take out fewer loans by winning more scholarships! You can start finding them using the CollegeXpress Scholarship Search tool. 

Like what you’re reading?

Join the CollegeXpress community! Create a free account and we’ll notify you about new articles, scholarship deadlines, and more.

Join Now

Join our community of
over 5 million students!

CollegeXpress has everything you need to simplify your college search, get connected to schools, and find your perfect fit.

Join CollegeXpress
Nikole Dixon

Nikole Dixon

$500 Refer-a-Friend Scholarship Winner

Toward the beginning of last year, I was searching for scholarships to apply to through my school, town, websites online, and anything else I could find. I asked tons of questions [online] about scholarships and the best places to find them because I was desperate and needed as many as I could find. I came across a ton of bogus websites, but as soon as I found CollegeXpress, I knew I had to tell other people about it. It was definitely the most helpful site I came across, so I told my friends about it. CollegeXpress is definitely a website worth giving as a source.

Asia Stockdale

Asia Stockdale

High School Class of 2021

CollegeXpress helped me overcome a huge hurdle. Because of the small town I live in, I felt like I would never achieve more. I felt like I could never go beyond because of costs. I feared I wouldn’t be able to find scholarships. I had no idea of where to start. With CollegeXpress, I easily found scholarships—they came to me. It was a helper, and I was instantly matched with opportunities to go above and beyond educationally.

Kelly Nogueiro

Kelly Nogueiro

Counselor

For me, CollegeXpress has given me a valuable tool to use with my students to explore colleges easily beyond objective data. It helps me find colleges for students that fit their needs and wants that aren’t quite so black and white. It's a wealth of knowledge, and the Type-A side of me loves all the lists and the fact that I know they're coming from folks who know what they're talking about. I share it with colleagues and students alike, and it's always well received.

Leah Maciel

Leah Maciel

High School Class of 2021

CollegeXpress has helped me with all aspects of applying for college. The website is extremely easy to navigate and gives access to so many resources. I was able to research all of the colleges I was interested in, find out any information I wished to know about, and keep them organized in a list. I've also been able to research scholarships and save them as resources for later. I've used many websites in my college and scholarship search, and CollegeXpress has by far been my favorite one to use.

Sonny Harris

Sonny Harris

College Student

For the entire year before college, I spent a lot of time deeply considering what major I wanted to go into and how to fund my higher education. After a lot of research, I came across CollegeXpress, which helped me ultimately find a ton of scholarships for which I could apply—and some of which I received! If it weren’t for CollegeXpress, I may not have found those scholarships as they didn't appear on any other scholarship search forum. Additionally, I learned more about the options I had been considering for my major through CollegeXpress’s resources. In the end, I chose to major in Computer Science, as it seemed best suited to me and the careers in the field seemed enjoyable, and I've never been more excited to move into my future! Ultimately, I want to thank CollegeXpress for offering their services. I received enough financial aid in scholarships to fund my entire freshman year of college and even got some money refunded which I used to purchase a new laptop, and I bought all of the books I needed for the semester!

College Matches
X

Colleges You May Be Interested In

Seton Hall University

South Orange, NJ

Holy Family University

Philadelphia, PA