Types of Student Loans: Federal and Private

Credible takeaways

Subsidized and unsubsidized federal loans generally offer the lowest interest rates compared to other types of student loans.
All federal student loans offer borrower protections that private loans don’t, but may come with lower borrowing limits.
Private student loans can fill a gap in funding, but many students must apply with a cosigner to qualify.
You can access federal loans via the FAFSA, and private loans directly through a lender’s online application.

Paying for your education may mean using a mix of federal and private loans to pay for college, as well as scholarships and grants. When it comes to student loans, your main options include Federal Direct Loans from the U.S. Department of Education, and private student loans from a bank, credit union, or other lender.

In general, it’s wise to max out your eligibility for federal student loans before borrowing privately, since the government offers helpful repayment plans, forgiveness programs, and other benefits.

Compare student loan options

	Direct Subsidized Loans	Direct Unsubsidized Loans	Direct PLUS Loans	Private student loans
Type of loan	Federal	Federal	Federal	Private
Interest rate	5.50%	5.50% for undergraduates; 7.05% for graduate and professional students	8.05%	Based on credit
Eligibility	Undergraduate students with financial need	Undergraduate and graduate students; no financial need requirement	Graduate students or parents of dependent undergraduates; must not have adverse credit	Based on credit and other factors, like income
Repayment terms	10 to 25 years	10 to 25 years	10 to 25 years	5 to 20 years, but varies by lender
Aggregate borrowing limit	$23,000	$31,000 for undergraduates; $138,500 for grad students	Up to cost of attendance	Typically up to cost of attendance; varies by lender
Best for	Undergraduate students from low-income households	Undergraduate and graduate students who don’t qualify for need-based aid	Graduate students and parents who want federal benefits	Borrowers (or cosigners) with good or excellent credit; borrowers who have maxed out federal loans

^{[Interest rates apply to loans first taken out on or after July 1, 2023, and before July 1, 2024.]}

Related: Average Student Debt in 2024

Types of federal student loans

Federal Student Aid, an office within the U.S. Department of Education, offers several student loans to eligible students and parents.

1. Direct Subsidized Loans

Best for: Undergraduate students from low-income backgrounds

Direct Subsidized Loans are available to undergraduate students with financial need, as determined by the schools that receive your Free Application for Federal Student Aid (FAFSA).

The government covers interest on subsidized loans while you’re in school at least half-time, during your grace period, and during any other periods of deferment.

In 2023-24, Direct Subsidized Loans have an interest rate of 5.50% and a loan fee of 1.057%. Borrowing limits range from $3,500 to $5,500 per year, with an aggregate limit of $23,000.

2. Direct Unsubsidized Loans

Best for: All undergraduate, graduate, and professional students

Direct Unsubsidized Loans are available to any student, undergraduate or graduate, who’s eligible for federal aid. There’s no financial need requirement, but there’s also no interest subsidy — you’re responsible for paying all the interest that accrues from the date of disbursement.

Direct Unsubsidized Loans have an interest rate of 5.50% for undergraduates and 7.05% for graduate students, along with a loan fee of 1.057%.

Dependent undergraduates can borrow between $5,500 and $7,500 per year, with an aggregate limit of $31,000. Graduate students can take out $20,500 per year with an aggregate limit of $138,500, which includes any loans borrowed as an undergraduate.

3. Direct PLUS Loans

Best for: Graduate students who’ve maxed out unsubsidized loans; parents of dependent students

The federal government offers two types of Direct PLUS Loans geared toward graduate students and parents of dependent undergraduates:

Grad PLUS loans: Available to graduate students
Parent PLUS loans: Available to parents of undergraduate students

Direct PLUS Loans have higher interest rates and fees than Direct Subsidized and Unsubsidized Loans, with a rate of 8.05% and loan fee of 4.228% in 2023-24. But the upside is that you can take out up to your school’s cost of attendance, minus any other financial aid received.

Direct PLUS Loans also require that borrowers don’t have adverse credit, such as a bankruptcy or loan default in the past. If you have adverse credit, you may still be able to borrow a PLUS loan by applying with an endorser — which is similar to a cosigner — or by documenting the extenuating circumstances around your adverse credit. You must also complete PLUS counseling.

Good to know:

To access federal student loans and other financial aid, like grants and scholarships, students need to complete the FAFSA annually.

Types of private student loans

If you need additional funding for school, a private student loan could fill the gap. You can find private loans from banks, credit unions, and online lenders. To qualify, you (or your cosigner) will need to meet a lender’s requirements for credit, income, and debt-to-income ratio (DTI).

1. Private loans for students

Best for: Students who need additional funding after maxing out federal subsidized and unsubsidized loans

Many private lenders offer loans to both undergraduate and graduate students. Some also provide loans for specific programs, such as medical school loans, law school loans, and MBA loans.

Graduate students may be able to qualify for a private student loan on their own, but the majority of undergraduates (over 93%) apply with a cosigner, such as a parent, according to the latest report from Enterval Analytics. Depending on the lender, you may be able to borrow up to your school’s cost of attendance.

Rates can be fixed or variable, and terms may span anywhere from five to 20 years. Most lenders offer a six- or nine-month grace period.

2. Parent student loans

Best for: Parents who prefer to take on the burden of debt for their child and fully manage the terms of the loan

Parents who want to help their kids pay for college can also find private parent student loans. Interest rates may be higher on parent loans than student loans, and repayment options might be more limited. For instance, some lenders require parents to start making small or full payments on their loan right away, rather than offering a grace period.

Federal vs. private student loans

Both federal and private student loans can help you pay for college or graduate school, but they have several differences potential borrowers should be aware of:

	Federal student loans	Private student loans
Eligibility	More widely accessible	Credit check required
Interest rates	Fixed; generally lower	Fixed or variable; generally higher
Borrowing limits	Annual and aggregate borrowing limits apply	Typically up to your school’s cost of attendance
Key benefits	Income-driven repayment plans, deferment, forbearance, and forgiveness options	Competitive rates for borrowers with strong credit
Cosigner option?	No	Yes

Most federal loans don’t have a credit requirement, and they come with fixed interest rates. They’re eligible for multiple repayment plans, as well as protections like deferment, forbearance, and loan forgiveness. However, they may come with borrowing limits that fall below the amount you need for school.

Private loans, on the other hand, typically have a credit requirement, so many students must apply with a cosigner to qualify. Rates may be fixed or variable, and your repayment plan and deferment options are up to the discretion of the lender. You can often borrow as much as you need to pay for school, but your private loans won’t be eligible for forgiveness programs or other federal benefits.

How to choose the right student loan

Everyone’s financial situation is different, so there’s no one-size-fits-all rule for which student loan you should choose. However, it’s generally a good idea to max out your eligibility for federal Direct Subsidized Loans, if available, since they’re likely your most affordable option. After that, consider borrowing federal Direct Unsubsidized Loans to pay for school.

If you need additional money after that, consider whether a federal Direct PLUS Loan or a private student loan would offer the better deal. If you have excellent credit, you may find a private lender that offers lower rates and no fees. Just keep in mind that private loans don’t usually offer as many borrower benefits as federal student loans do.

If you decide you need a private student loan, make sure you compare as many lenders as possible.

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Frequently asked questions

What is the best type of student loan?

The best student loan type is the Direct Subsidized Loan, which is available to undergraduate students with financial need. The government covers interest while you’re in school and during your grace period, so you don’t have to worry about your balance growing as you earn your degree. Plus, this loan has a competitive interest rate and a variety of repayment options. The downside is Direct Subsidized Loans have lower borrowing limits than other types of loans and aren’t available to everyone.

When should I apply for a student loan?

If you’re looking to borrow federal student loans, submit the FAFSA as soon as possible. The form usually opens on October 1 every year, though for 2024-25, it opened in December 2023. Submitting the FAFSA will put you in the running for Direct Subsidized and Unsubsidized Loans, as well as grants and the federal work-study program. As for private student loans, you can apply at any time, but it may take anywhere from 10 days to a few weeks or more for the lender to process your loan. Starting the process early can ensure your tuition bill gets paid on time.

How are student loans different from other types of loans?

Unlike other types of loans, student loans are designed for higher education. They often come with a grace period, allowing you to postpone payments while you’re in school and for several months after you graduate or drop below half-time enrollment. Student loans may also come with certain protections, such as forbearance, deferment, loan forgiveness, and income-driven repayment plans. If you pay student loan interest during the year, you could also qualify for a tax deduction up to $2,500.

Eric Rosenberg contributed to the reporting for this article.

Meet the expert:

Rebecca Safier

Rebecca Safier has more than eight years of experience in personal finance. Her work has been featured by CNN, U.S. News & World Report, New York Post, USA TODAY Blueprint, and Buy Side WSJ.

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