The world’s #1 Guide to Scholarships and Financial Aid

12.1.    Federal vs. Private Loans

Loans come from two main sources: the federal government and private lenders (banks, credit unions, or companies). Each has pros and cons.

• Federal Loans 

  • Source: U.S. Department of Education, accessed via the FAFSA.

  • Types: 

    • Direct Subsidized: For undergrads with financial need; the government pays interest while you’re in school and during a six-month grace period after graduation.

    • Direct Unsubsidized: For undergrads and grads, no need required; interest accrues from day one.

    • PLUS Loans: For parents or grad students, higher limits but with credit checks.

  • Pros: Fixed interest rates, flexible repayment plans, no credit check for most (except PLUS), and access to forgiveness programs.

  • Cons: Borrowing limits (e.g., $5,500–$12,500/year for undergrads, depending on year and dependency status).

• Private Loans 

  • Source: Banks (e.g., Sallie Mae, Discover), credit unions, or online lenders.

  • Types: Vary by lender—some mimic federal loans, others are tailored (e.g., for medical school).

  • Pros: Higher borrowing limits (up to full cost of attendance), sometimes lower rates for stellar credit, and faster approval.

  • Cons: Variable or higher fixed rates, stricter repayment terms, credit-based eligibility (often requiring a co-signer), and no federal protections.

Which to Choose?: Start with federal loans—they’re safer and more forgiving. Only consider private loans if you’ve maxed out federal options and need more, but shop around for the best deal.

Tip: Exhaust scholarships and grants first—every dollar you don’t borrow is interest you don’t pay.