Student loans come from two very different sources: the federal government and private lenders such as banks, credit unions and online lenders. The choice between them affects not only the rate you pay but also what happens if money gets tight after graduation.
Key takeaways
- Federal loans have fixed rates set by law and built-in hardship options.
- Private loans depend on credit and usually offer fewer repayment options.
- Use grants, scholarships and federal loans before private loans.
How federal student loans work
Federal student loans are made by the U.S. Department of Education. You apply by filing the FAFSA, the same form used for grants and work-study. Rates are fixed for the life of each loan and are set by law, the same for every borrower in a given year and loan type.
Most undergraduate federal loans do not require a credit check or a co-signer. Federal loans also come with built-in protections, including income-driven repayment options, deferment and forbearance during hardship, and eligibility for certain forgiveness programs. Borrowing limits and repayment plans changed for loans made on or after July 1, 2026, so check current details on StudentAid.gov.
How private student loans work
Private student loans are credit-based. The lender reviews your credit history, or your co-signer’s, and sets a rate that may be fixed or variable. Borrowers with strong credit, or a strong co-signer, may find competitive offers.
Repayment options are set by each lender. Some offer temporary hardship forbearance, but income-driven plans and federal forgiveness programs are not available. A co-signer is legally responsible for the debt if you do not pay.
Side-by-side comparison
| Federal loans | Private loans | |
|---|---|---|
| Who lends | U.S. Department of Education | Banks, credit unions, online lenders |
| How to apply | FAFSA | Directly with each lender |
| Rate | Fixed, set by law | Fixed or variable, based on credit |
| Credit check | Not for most undergraduate loans | Yes |
| Hardship options | Income-driven repayment, deferment, forbearance | Set by lender, usually limited |
The usual order of funding
- Scholarships and grants, which do not need to be repaid.
- Work-study and savings.
- Federal student loans.
- Private loans, only for any remaining gap.
Tip: When comparing private offers, look at the APR, rate type, fees, co-signer release rules and what hardship options the lender actually provides in writing.
Types of federal loans
Federal loans for undergraduates include Direct Subsidized Loans, where the government pays the interest while you are in school at least half-time, and Direct Unsubsidized Loans, where interest builds from the start. Graduate students can borrow Direct Unsubsidized Loans, and parents of dependent undergraduates can borrow Parent PLUS Loans, which include a credit check. Each type has annual and total borrowing limits set by law, and new limits apply to loans made on or after July 1, 2026.
How to compare private offers step by step
- Use federal aid first, then work out the remaining gap for the school year.
- Prequalify with several private lenders to see estimated rates.
- Compare fixed and variable options, fees and the total cost over the term.
- Check whether payments are required while you are in school.
- Read the lender’s hardship, co-signer release and death or disability policies.
Mistakes to avoid
Skipping the FAFSA is the biggest mistake, because it is the gateway to grants, work-study and federal loans. Another is borrowing the full amount offered instead of what you actually need. Every dollar borrowed has to be repaid with interest. Finally, avoid choosing a variable-rate private loan only because the starting rate is lower, unless you can handle higher payments if rates rise.
Common questions
Can I have both federal and private loans?
Yes, many students do. Keep a list of each loan, its servicer, rate and repayment terms.
Can parents borrow instead?
Parents can take federal Parent PLUS loans, which do involve a credit check, or private parent loans. The parent, not the student, is responsible for repaying them.
When should I start repaying?
Most federal loans offer a grace period after you leave school before payments begin. Private lenders set their own rules, and some require payments while you study.
Do federal loans need a co-signer?
Most undergraduate federal loans do not. Private lenders often require one for students with limited credit history.
Can I cancel a loan after it is disbursed?
Federal rules allow you to cancel all or part of a loan within a set period after disbursement. Private lenders have their own policies, so read them before you accept.
How much should I borrow in total?
A common rule of thumb is to keep total student debt below your expected first-year salary in your field. It is not a strict rule, but it helps keep future payments manageable. Borrow only what you need for each year, not the maximum offered.
Already repaying? See the difference between refinancing and consolidating student loans.