Generally speaking, there are two broad categories of student loans – private student loans and federal or government student loans. The two categories of loans have many similarities, but it is the differences between them that are crucial to borrowers.
Federal student loans are funded or guaranteed federal government.
Private student loans are nonfederal loans, made by a lender other than the federal government such as banks, credit unions, state agencies, and schools. Private loans are not guaranteed by the federal government.
The terms and conditions for federal student loans are made by the government and set by law. Some of these laws include many benefits to borrowers such as fixed rates of interest, income-driven repayment plans and loan forgiveness.
In contrast, private student loans are made by private organizations and the terms and conditions for private student loans are not set by law but directly by the lender. For this reason, many of the benefits of federal loans like income-driven repayment plans and loan forgiveness are not available under.
The following table details the key differences between federal and private student loans:
| SUBJECT | FEDERAL LOAN | PRIVATE LOAN |
| When payments become due | Repayments does not begin until the borrower (1) graduates, (2) leaves school, or (3) change status to less than half-time. | Many private student loans require payments while the borrowers are still in school. Some lenders allow in-school deferments. |
| Interest Rates | Rates are fixed (they don’t change). Rates are often lower than private loans and much lower many some credit cards. | Private student loans can have variable or fixed interest rates depending on the terms of the loan. |
| Subsidies | Qualifying borrowers who have demonstrated a financial need, may qualify for a loan for which the government pays the interest while the borrower is still in school called a “subsidized loan.” | Private student loans are rarely not subsidized. Borrowers are responsible to pay all the interest despite financial need. |
| Credit Checks | Except for “Plus Loans” borrowers do need to get a credit check to qualify for federal student loans. | Private lenders generally require a credit check to qualify for a loan. If the borrower does not qualify, the lender may require a cosigner. |
| Consolidation and Refinancing | Federal loans may be can be consolidated into a “Direct Consolidation Loan” and retain the benefits of like income-driven repayment plans, debt forgiveness, and total and permanent disability. | Private student loans cannot be consolidated into a “Direct Consolidation” Loan but may be refinanced through the lender or another lender. |
| Payment Postponement | If a borrower is having trouble making loan payments, the borrower may be able to temporarily postpone or lower payments through deferment and forbearance. | Some but not all private lenders make deferment and forbearances available to borrowers. |
| Repayment Plans | There are a variety of repayment plans available to federal loan borrowers including income-driven repayment plans. | Some but not all private lenders offer repayment plans, but they are generally not obligated to do so. |
| Prepayment Penalties | There are no prepayment penalties. | There may be prepayment penalties depending on the terms of the loan. |
| Loan Forgiveness | Some borrowers may be eligible to have some portion of their loans forgiven if the borrower works in public service. | Private lenders generally do not offer loan forgiveness. However, some state funded programs do offer public sector forgiveness programs. |