College Finance

Federal vs. Private Student Loans

Generally, there are two types of student loans:

1) Federal Student Loans.

Made by the federal government, Federal Student Loans combine low, fixed interest rates, a variety of payment choices, and even some forgiveness options. But there are fees to get these loans and there are limits to how much you can borrow. The most common federal student loans are:

Federal Direct Student Loans. Every student who is enrolled in college at least half time is eligible for Federal Direct Subsidized Loans and/or Federal Direct Unsubsidized Loans. Your FAFSA determines whether the interest on your loan will be subsidized by the federal government or not. Read more about subsidized and unsubsidized loans below and on the Federal Student Aid website.

Federal Parent PLUS Loans are also offered by the federal government. These loans are issued in your parent’s name and generally have higher interest rates and fees than Direct Federal Loans offered to you.

Federal Graduate PLUS Loans. To graduate or professional students enrolled at least half-time at an eligible school in a program leading to a graduate or professional degree or certificate. If you receive a Direct PLUS Loan as a graduate or professional student, you don't have to make any payments while you're enrolled in school at least half-time, and for an additional six months after you graduate, leave school, or drop below half-time enrollment.

Be aware: a Parent PLUS Loan is in the parent’s name only. Don’t accept a Parent PLUS Loan as an “award” without understanding the interest rate and payment terms. In 2016, the Parent PLUS APR is 7.29%.

2) Private Student Loans:

Nonfederal loans offered by banks, credit unions, or other lenders. If you qualify, you can borrow up to 100% of what isn’t covered in your financial aid package. Plus, you can have a parent or other person cosign on the loan for you, which could help you qualify.

You will generally get a better interest rate if you have a good credit history and/or have a cosigner, but check with your lender on the details.


Explore Federal Direct Loans First
As long as these loans are in the student’s name only (that’s you), they’ll have lower interest rates than Federal Parent PLUS Loans or Private Student Loans.

Types of Federal Student Loans

Federal Direct Student Loans come in three flavors:

Subsidized loans:

If you’re an undergraduate with financial need, you may quality for a low-interest loan with an added benefit: The interest is paid for you as long as the loan is in your (the student’s) name only, and you’re enrolled in school at least half time. Plus you get a six-month grace period before payments start.


Grab the subsidized loan if you qualify!

Unsubsidized loans:

You don’t have to show financial need to qualify for unsubsidized loans. Interest on the loan starts adding up while you’re studying, but typically at a very low rate.


You don’t need your parents to cosign for Federal Direct Student Loans—and their credit rating doesn’t affect whether you qualify. You can do this!

Federal Parent PLUS loans:

Parent PLUS loans are federal loans issued to parents of undergraduate students. With a PLUS loan, your parent assumes all responsibility for repayment.

Parents can borrow up to the cost of attendance minus other aid received, which is cool, but don’t assume PLUS loans are always the best financial deal.

For instance, there is a 4.272% origination fee to take out a PLUS loan (prior to October 1, 2016; on or after that date the rate will be 4.276%), and you’ll start racking up interest while you’re in school. The loans have fixed interest rates of 6.31% (APR of 7.29%) for the 2016-2017 school year, which is higher than some private student loans.

Repayment for a PLUS loan starts 60 days after funds are sent to the school but can be deferred. The standard repayment is 10 years.


cuLearn lenders offer private student loans that could replace the Federal PLUS loans in your financial aid package.

For more information about all these federal loans, go to

Benefits of Federal Student Loans

Even if you don’t qualify for a subsidized loan, the benefits of Federal Student Loans make it worth your time to fill out your FAFSA:

Low, fixed rates:

Rates on Federal Student Loans are currently between 3.76% for Federal Direct Subsidized Loans and 6.31% for Federal Parent PLUS Loans. They’re also fixed (won’t change) over the course of the loan.

No payments during college:

You don’t have to start repaying Federal Student Loans (except Parent PLUS loans) until you graduate — unless you drop below half time. So keep those credits up if you can. You’ll also receive a 6- month grace period before payments begin.

Flexible repayment plans:

You may be able to postpone making loan payments if you’re having financial difficulties. Nice.

Cancellation for certain types of jobs:

Some jobs, such as serving in the military or teaching in a low-income school may qualify you to have all or part of your student loans forgiven.

No credit check:

You don’t need your parents (or anyone else) to cosign for Federal Direct Student Loans—and your parent’s credit rating doesn’t affect whether you qualify. Remember, for both subsidized and unsubsidized loans, the loan must be in your (the student’s) name only.

Private Student Loans: Closing the Gap

Students and families may use Private Student Loans to “close the gap” between what their schools offer, grants and scholarships, Federal Direct Loans (subsidized and unsubsidized), work-study and other financial aid offers, and what they actually need.

While these loans don’t have all the protections and benefits of Federal Student Loans, they can still be a great option — as long as you don’t borrow more than you need. For many families, Private loans can have better rates and fees than Federal PLUS loans.


While there are plenty of low-cost lenders out there who want to help you borrow wisely, there are also some loans and private lenders you simply don’t want in your life. Get the scoop now before you shop around. Know Your Lender

Three Major Benefits of Private Student Loans

Better rates and fees:

As you can see from the chart above, one big benefit of Private Student Loans over Parent PLUS Loans is the potential savings. Keep in mind, though, that the loan may have to be in your name along with your parents (or others who would agree to cosign).

More options:

You’ll also have more choices with private lenders—from fixed rate and variable rate loans to lines of credit.

Money management tools:

Some private lenders offer student checking accounts, student savings accounts, and student debit/credit cards. These other accounts help develop good life skills, but remember to check the fees on those accounts to be sure you’re getting a good deal.

Created and compiled by Denise Eder, cuLearn and a talented writer/editor

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