Federal vs Private Student Loans

The banks and private lenders will tell you that private student loans are "just like" federal loans, just with "better rates" or "more flexibility." They're lying. Private student loans are predatory debt traps designed to maximize profit. Federal loans are the safest forms of student debt. Here's the real difference, and why you should always prioritize federal loans.

1. Interest Rates: Fixed vs Variable

Federal loans have fixed interest rates set by Congress (currently around 5-6%). Your rate is locked in for the life of the loan. Private loans have variable rates (currently 8-12%) that can go up at any time. A 6% fixed rate is better than an 8% variable rate that could become 12% tomorrow. The bank wants you to take variable rates because they can raise them whenever they want, which means more profit. Don't fall for it. Fixed rates are better. Federal loans have them. Private loans usually don't. Choose federal.

2. Credit Checks and Co-Signers

Federal loans (except PLUS loans) don't require a credit check or co-signer for most students. Private loans require both. If you have bad credit or no credit, you can't get a private loan without a co-signer. And if you default, the co-signer is on the hook. The bank wants co-signers because it means more people responsible for the debt, which means less risk for them. But it's more risk for you and your family. Federal loans don't require this. You can get them regardless of credit. Choose federal.

3. Income-Driven Repayment

Federal loans offer income-driven repayment plans that cap your monthly payment at 10-15% of your discretionary income. If you make $30,000 a year, your payment might be $50 a month. If you make nothing, your payment is $0. Private loans don't offer this. You pay what you owe, regardless of income. If you can't pay, you default. The bank wants fixed payments because it means more profit. But income-driven repayment protects you. Federal loans have it. Private loans don't. Choose federal.

4. Loan Forgiveness Programs

Federal loans offer forgiveness programs like Public Service Loan Forgiveness (PSLF), which forgives your debt after 10 years of public service. Private loans don't offer forgiveness. Ever. You pay every dollar you borrowed, plus interest, no matter what. The bank doesn't want to forgive debt because it means less profit. But forgiveness protects you. Federal loans have it. Private loans don't. Choose federal.

5. Death and Disability Discharge

If you die or become permanently disabled, federal loans are discharged. Your family isn't responsible for your debt. Private loans are rarely discharged in death or disability. Your co-signer (usually a parent) is still responsible. The bank wants your family to be responsible because it means they get paid even if something happens to you. But death and disability discharge protect your family. Federal loans have it. Private loans don't. Choose federal.

6. Bankruptcy Discharge

Federal loans are almost never discharged in bankruptcy. Private loans are also rarely discharged, but it's slightly more possible. However, this shouldn't be your plan. The real protection is income-driven repayment and forgiveness, which federal loans have and private loans don't. The bank doesn't want you to think about bankruptcy because it means less profit. But income-driven repayment is better than bankruptcy. Federal loans have it. Private loans don't. Choose federal.

7. Deferment and Forbearance

Federal loans offer deferment and forbearance if you're unemployed, in school, or facing financial hardship. During deferment, interest doesn't accrue on subsidized loans. During forbearance, interest accrues but you don't have to pay. Private loans might offer forbearance, but interest always accrues, and they're less likely to grant it. The bank doesn't want to pause payments because it means less profit. But deferment and forbearance protect you. Federal loans have better options. Choose federal.

8. The Bottom Line

Federal loans are better in every way: fixed rates, no credit check, income-driven repayment, forgiveness programs, death/disability discharge, and better deferment/forbearance options. Private loans are worse in every way: variable rates, credit checks, fixed payments, no forgiveness, rarely discharge, and worse deferment options. The bank wants you to take private loans because they're more profitable. Don't fall for it. Always prioritize federal loans. Exhaust all federal options before considering private loans. The bank will survive. You'll save money and have better protections.