10 Major Differences Between Federal and Private Student Loans

Typically, there are two types of student loans – federal and private student loans. It is possible to have either or both of them.

Most student borrowers often apply for federal student loans first and when they exceed the limit, take out private loans to make up the difference in tuition.

The very first step to understanding how your student loan works is knowing:

  1. What type of student loan you have
  2. Who you actually owe.

This is uber important because it lays the foundation for how your student loan is treated and the options available to you when you need it.

Once you receive federal student loans, you owe the government. When you take out a private student loan, you owe a financial institution.

10 Major Differences Between Federal and Private Student Loans

Your student loan is assigned to a loan servicer by the U.S Department of Education once it is paid out. Some popular loan servicers include; American Education Services (AES), Nelnet, Great Lakes Educational Loan Services, Navient, etc.

A complete list of loan servicers is available on the Federal Student Aid website. Let’s get right into these differences.

1. Credit History:

Private lenders place a strong emphasis on your credit score and history to approve your student loans. They will require a strong cosigner if you have no or low credit score.

Federal student loans are typically granted without a credit check. At the very least, it doesn’t play a strong role in the approval process – with the exception of the PLUS loan.

2. Consolidation and Refinancing Options:

A loan consolidation occurs when you have multiple loans with multiple rates and you decide to combine them into one fixed loan with one interest rate and one payment.

The first time I logged into my student loan account, I realized my loans were grouped into categories; for instance, subsidized versus unsubsidized and had different interest rates.

Even though I was making one payment, that payment was being applied in piecemeal across the loans.

Consolidating your student loans at some point might make sense for you. Federal student loan borrowers have the opportunity to consolidate their multiple student loans into direct loans for free.

Private loans cannot be consolidated but can be refinanced.

3. Deferment Opportunity:

Going through a hard time and have federal student loans?

You have the option of postponing your student loan by applying for forbearance through your loan servicer without impacting your credit score negatively.

On a private loan, deferment is not guaranteed. You have a greater chance of getting a deferment with a federal loan than a private loan.

For instance, in March 2020, the federal government put into effect a temporary suspension of student loan payments due to the global pandemic beginning March 13th, 2020 through September 30th, 2020.

Once the announcement was made, it went into effect immediately. Borrowers didn’t have to contact their student loan servicers.

The pause in student loan payments would not impact the borrower’s credit scores negatively and interest was suspended as well. Only federal student loan borrowers received this benefit.

Most borrowers seized the opportunity to either save more into their emergency funds, pay down other high-interest loans like credit cards, or invested their would be payments.

Private student loan borrowers had to continue making payments or were subject to contacting their loan servicers to ask for relief if they had lost their jobs in the pandemic.

Please note: Your loan will keep accruing interest while in deferment especially if your loan isn’t subsidized and you’re no longer in school. The global pandemic pause was an exception.

4. Default Status:

It takes 270 days (9 months) for a federal student loan to be considered in default status. In contrast, a private student loan is considered in default after 120 days (3 months) of non-payment.

5. Interest Rates:

The interest rates on any loan you take out matters because it determines your payment.

Interest rates on federal loans are fixed and usually lower than private student loans. Private student loans can be either fixed or variable and tend to be much higher than federal loans.

6. Loan Forgiveness:

Federal student loan borrowers may qualify for student loan forgiveness based on some criteria like; working in public services such as a doctor or teacher, working for a government agency, or non-profit.

Private student loan borrowers do not have the option of receiving student loan forgiveness.

7. Prepayment Penalties:

On federal student loans, there is no prepayment penalty ever. You can pay off your federal student loans if you happened to win the lottery tomorrow.

With a private loan, you have to make sure the terms doesn’t include a penalty for paying off the loan earlier than agreed.

8. Repayment timeframe:

Payments are not due on your federal student loans until you graduate, drop out, or become a less than a part-time student.

Upon graduation, you’re given a 6 month grace period before payments on your federal student loans become due.

With a private student loan, payments are due as a student. You might be able to defer while in school but you have to verify with your loan servicer.

9. Repayment Options:

Federal student loan borrowers have a few options when it comes to repayment as well. There are several repayment plans available based on your income such as; income-sensitive, pay as you earn, revised pay as you earn, etc.

I’ve written a detailed blog post about student loan repayments and how they work. Private student loan borrowers have to contact their lender to find out their options – if any.

10. Subsidization:

Federal student loans are often subsidized for undergraduate degrees.

Subsidization means being supported financially; having part of the cost of production paid in order to keep the selling price low.

The American government is determined to help her citizens become formally educated and allocates an annual budget to this goal.

Typically, undergraduate students file for FASFA (Free Application for Federal Student Aid) and receive Pell grants which doesn’t have to be paid back if approved.  If they do not qualify, they receive subsidized student loans.

When your student loans are subsidized, it means the government is paying the interest on your behalf as long as you stay in school.

On the other hand, private student loans for undergraduate degrees are not subsidized. Please note: Federal student loans for graduate school are not subsidized. 


There is a lot of discussion about student loan forgiveness, especially now in the pandemic. Will it happen? No one knows.

Do you know what kind of student loans you have?

Are you paying your federal student loans through this pandemic or did you take advantage of the deferment to boost your savings account, pay off other high-interest debt or invest the money? Share with me below.

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About Ogechi

Hello, I'm Linda Ogechi. I'm a financial educator, real estate investor, and founder of OneSavvyDollar. I write to empower you into saving more, paying off debt, increasing your net worth, and building real wealth so you can achieve financial freedom

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