Americans pay $1.48 trillion in student loans every year. Around 66% of graduates from public colleges have student loans, and that jumps to 88% when including graduates from for-profit colleges.

Student debt is a massive burden on young people entering the workforce and is part of the reason so many millennials are struggling to afford their first house. This debt lasts for years, and can sometimes follow people into their 40’s.

With this in mind, applying for student loans is extremely important. You need to consider all aspects of a loan before you apply, whether it’s private or federal. Ahead, we’ll discuss the difference and tell you why federal loans are usually the best option.

Federal or Private?

There are two kinds of student loans: federal and private. The federal government handles federal school loans, and private lenders such as banks or schools cover private student loans (as their names suggest). Most of the time, a federal student loan is your best option. Start applying for these loans first and use the private sector as your plan B.

Interest and Credit Score

Federal loans should be the first stop in your quest for a student loan. Most people won’t have any established credit when they’re going to college, and federal loans don’t require a credit check. The interest rate is the same for everyone, and the interest rate is fixed. Private loans have variable interest rates, which means they can go up over time.

If you have bad or no credit, getting a private loan will cost you a lot more automatically. Federal loans, on the other hand, put everyone on a level playing field. Federal loans give you a way to establish credit, which will give you a leg-up when applying for credit cards and looking for housing in the future. A private loan, on the other hand, will probably require you to have a cosigner with good credit help you apply.

Additionally, the interest of a federal student loan is most likely tax deductible. This won’t be the case with most private loans. You probably won’t think about this aspect much when applying for college loans, but it will save you a considerable amount of money once you’ve finished your degree.


Another massive benefit of federal loans is that you won’t have to start paying them until you’re out of college. Most college students find time for a part-time job to cover some of their living expenses. Tacking-on hundreds of dollars a month in school payments isn’t feasible for them, which is why federal loans wait until you’re out of college and established in the “real world.”

Private loans can start asking for payments while you’re still in school. You barely have enough time to study and make your shift at the shoe store, but the banks don’t care. They want their money ASAP so they can start lending it out again.


Banks and other private organizations don’t usually care about whether you can pay something back to them or not. They want their money and don’t care whether it’s reasonable or not. Federal loans, on the other hand, are far more forgiving when you leave college.

Most federal loans have an option that ties your repayment to your income. Some don’t even start accruing interest until you’ve left college, which means you’ll start fresh when you start your career. If you start with a lower salary, federal loans will adjust their payment schedules and allow you to pay them as you can. Private organizations want their money now, and won’t usually negotiate like this.

If you find that your calling is public service, fantastic! You’re doing great things in the community, and federal loans will recognize this. They usually forgive a portion of the loan because your profession involves giving back. Private loaners don’t care what you do; they just want you to pay up.

Furthermore, if you’re having a lot of trouble coming up with your payments, federal loans allow you to postpone or lower payments. The government understands that it can be hard to establish yourself in the professional world, and offer some leeway. Again, private companies don’t care and want all the money you borrowed as soon as they can. If not, they’re content charging you variable interest and late fees until they’ve made a healthy profit from you.


Defaulting on any loan is the worst-case scenario, but the unexpected often happens. It will ruin your credit rating, but federal loans are far more understanding than private loans when it comes to default. The time alone is more forgiving, with private borrowers considering their loans in default after only 120 days. Federal loans take 270 days until the government determines them in default.

Furthermore, a late payment will mean private lenders will start asking for money from your co-signer. Since you likely don’t have enough money to get a good private rate, you’ll almost always have a co-signer on your private loan. They’ll likely add some fees on top of this payment, which can be as high as nearly 40% of the loan balance.

Garnished wages is another reason most people prefer federal loans. The government can garnish your wages without a court order, but they don’t take the same percentage as private lenders do. The government will only take up to 15% of your income, while private lenders will seek around 25%, leaving the rest of your bills in jeopardy.

Why Choose Private?

Although federal loans are almost always better than private loans, there are some circumstances when you’d want to choose private. Companies like Wells Fargo and Discover school loans are the best or only option for some, even though federal loans typically have far more benefits associated with them.

Refinancing Loans

One of the universal reasons someone would choose private over federal is in the refinancing process. If you graduate with a fixed-rate interest loan that has a higher interest rate, it’s attractive to seek a private loan as a way to lower your monthly payments. Once you have a few years of paying your bills on time, your credit score will be good enough to get a decent rate from the private loan market.

The same is true when it comes to graduate school loans. If you attend graduate school right after college, you’ll probably still want to go with the federal loan option. Still, graduate loans don’t usually carry the same benefits as undergraduate loans. In fact, you might have to start paying your undergrad loans before you graduate with a higher degree.

If you decide to go to graduate school after a few years in the workforce, you probably have a foundation of credit that’s enough to qualify you for a decent private loan. Fixed rates are the safer route – especially with experts predicting the interest rate to rise over the coming years – but a variable rate is fine if the loan isn’t too big.

Getting a Better Rate

When you refinance your student loans, it’s because you’re going to get a better rate by going private. This might be the case right away if you or your parents have good enough credit. Federal loans don’t take credit rating into account, which is fantastic if you don’t have an established credit rating.

If you do have outstanding credit, though, you might prefer a private loan over a federal loan. If you can afford to pay the monthly payments while in school and don’t need any of the forgiveness perks, a private loan would be perfect for you.

Most of the time, though, you’ll want the benefits that come with having a federal loan. Most undergraduate students are just trying to figure out what they want to do with their lives, and can’t afford to shackle themselves with unforgiving debt when they’re still young.

Calculating Your Loan

A student loan calculator is a powerful tool, especially for young students who want to get an idea of how much money they need to repay. Looking at a number in a loan, you might not be able to determine what it actually means. How long will it take to repay the loan? How much will you have to make annually to pay it back? These are questions you might not consider when taking out your very first loan.

These calculators will tell you how much the loan will cost over its lifecycle, as well as how much money you need to make to repay the loan on time. They’re a valuable tool that will put your future in perspective. As a college student, paying your loan isn’t the first thing on your mind. You want to learn and have fun, but at the same time, you need to know what’s waiting for you at the end of the road.

Federal > Private For Most People

Federal loans are far better than private loans for most people. They’re more forgiving and offer you flexible payment options based on your job type and salary once you get out of school. Private lenders don’t consider the same things, and you might have to start paying interest before you even graduate.

There are some circumstances where you might prefer a private loan, but these are few and far between. Save the private loan for refinancing once you get out of school, and try to stick to a fixed-rate where you can.

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