Federal Loans vs. Private Loans: Which is Better for Me?

Sage Crary
Sage Crary
Director of Financial Aid and Scholarships; pursuing an MS in Ethics and Religion
Student Loans’ written in a notebook next to a keyboard and dollar bills.

Deciding what your best option is when choosing a type of educational loan isn’t just about an interest rate. There are many things to consider such as repayment options, deferment and in-school repayment requirements, cosigners, tax benefits, and consolidation or refinancing options if you have loans from your undergraduate degree. With so many things to consider, it may feel overwhelming at times.

First thing’s first – do you have student loans already from a previous degree? If this answer is ‘no’ you can skip ahead and just focus on options for graduate students by and of itself. But, if you are like millions of students who do have some educational debt from your undergraduate or other degree work, the first step is to determine which types of loans you have.

Federal vs. Private Student Loans

Fundamentally, there are two main categories of student loans: federal loans and private or alternative loans. These two categories are very different from one another when it comes to repayment and consolidation options, so it’s important to take inventory of what type of loans you have already to ensure your graduate educational debt ‘plays nicely’ with your existing loans when it comes to repayment. There is nothing worse than needing to write eight or ten or more checks a month for small individual loans that cannot be consolidated (aka merged) together. Not only is this a hassle, but it also means a much higher monthly payment amount than if your loans were consolidated.

If you don’t know which of your loans are federal and which are private, there are a few options for you to find out. First, you can review each of your current monthly loan statements and look for the words ‘Federal Direct Unsubsidized, Federal Direct Subsidized, Federal Perkins or Federal Direct PLUS Loans’ on the payment section of your monthly statement or online account. Any loans with those names are clearly Federal Loans.

Alternatively, you can log into your Federal Aid account or at the National Student Loan Database and view your federal loans there. Once you determine which of your loans are federal, you can assume that any remaining loans (if any!) are private or alternative loans. You want to make a list of which loans you have that are federal and which ones are private and your total loan balance on each before making the best decision for how to fund your graduate studies.

When it comes to monthly payments, consolidation, deferral, and payment plans, federal loans can only be combined with federal loans, and private loans can rarely be combined with anything. In fact, in most cases, if you have three different private loans, even if they are with the same servicer, you may still be required to make three separate payments. Private loans all have different terms and conditions, and unless you took the exact same private loan for more than one year in a row, you are bound to have private loans that don’t play nice together in repayment.

This same tenant is true for graduate student loans as well. Graduate federal student loans can be easily and automatically combined with any other federal student loans that you have, which means a lower monthly payment in the long run for you. Similarly, graduate private loans can never be combined with other loans.

Which is Better for Me?

So, if you have federal student loans from previous education, and you are seeking the most affordable and flexible repayment options, federal graduate student loans are a no-brainer. They are automatically consolidated once you graduate and offer a far greater variety of flexible and adjustable repayment options.

Furthermore, you also retain the advantages of forbearance, deferment, Teacher Loan Forgiveness and Public Service Loan Forgiveness that are only available for federal loan holders. Federal graduate student loans don’t all require a credit check, income requirements, and can be processed for you by your Financial Aid Office.

If you do not have federal loans from previous degrees, or if you are looking for the best interest rate and are comfortable with potentially a higher monthly payment for less interest paid during the life of the loan, then a private loan might be something to consider. Private loans do require a strong credit score and consistent income, but they give you the option of a strong cosigner if your credit or income is less than what you want it to be. In some cases, this can mean that you could receive a private loan for as low as 3.75-5%.

This contrasts with federal graduate loans which start at around 6.6% for the 2018/2019 award year. While this interest rate difference might sound massive, it’s only an average difference of $285 a year in interest on a $10,000 loan. But, for the consumer who is looking for the best rate and the lowest cost over time, it may be a good option with one caveat. Often the lowest interest rate private loans are variable and are not fixed rates. This means that the loan interest rate is subject to change at any time, so you do run the risk that in the long run your interest rate could exceed that of a fixed rate federal graduate loan.

In summary, if you have existing federal loans, it’s almost always the best decision to take a federal graduate loan for your graduate studies. This ensures you the most benefits when it comes to monthly payments and the potential for loan forgiveness down the road. If you do not have any federal loans from previous education, and you have a strong credit and financial status, a private loan may be worth the consideration. Whichever route you take, it’s best to read the fine print to ensure you know all the terms and conditions prior to signing on the dotted line.

Interested in learning more about your financial aid options? Explore our comprehensive funding e-guide here.

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