Federal vs. private student loans: Which is better?

The fall semester is quickly approaching. If you're planning on heading to college in September, you'll want to start securing financial assistance now — before it's too late.

Scholarships and grants are the best choices, as these won't need to be repaid. If you need more funding, though, student loans can help. There are typically two types of loans you can choose from: federal student loans and private ones.

Not sure which one you should use for your higher education costs? Here's what you need to know.

Begin exploring your student loan options online now.

What is a federal student loan?

Federal student loans are loans issued by the U.S. Department of Education. 

"They are far easier to qualify for than private student loans, they have flexible repayment options including income-driven repayment plans, offer forgiveness and loan discharge options, and interest rates are not based on credit — rather by law," says Elaine Rubin, director of communications for Edvisors. 

Federal student loan interest rates are also fixed, meaning your rate will never change as long as you have the loan. This helps provide consistency in payments — and makes for easier budgeting.

"All loans come with interest, but how much interest and how much you are responsible for paying will depend on the type of loan you get," says Patricia Lopez, director of financial aid and student loans at Santa Clara University. "Federal student loans include various benefits that most private loans do not, like need-based subsidies that prevent interest from accruing while a student is enrolled and fixed interest rates."

Some federal loans, like direct subsidized and direct unsubsidized ones, have limits. Others, like the Parent PLUS loan, allow you to borrow up to your college's full cost of attendance. This can be helpful for students with little assistance elsewhere, but according to financial aid advisor Jack Wang, it can also be dangerous.  

"Since PLUS loans allow a grad student or parent to borrow as much as they need, families can get themselves into real trouble with taking on way too much debt," Wang says. 

What is a private student loan?

Private student loans are, as the name suggests, loans issued by privately owned companies, not the federal government. This usually means more options in rate, term and repayment plans, but they can also come with a harder qualification process. 

"Private student loans are offered by financial institutions, will require a credit check and may require a cosigner," Rubin says. 

With private student loans, your credit score — or your cosigner's score — plays a big role in your ability to get the loan, as well as what rate you pay when you do. For this reason, private student loan interest rates are often much higher than federal student loan rates, which are subsidized by the government and not credit-dependent. 

The big perks of private student loans, Wang says, are "choices in borrower, rate, term and payment type."

"These allow a family to really plan their finances much more," Wang says. "Some private loans also offer benefits such as help with a job search or even a small cash-back option for good grades."

When is a federal student loan the best option?

In most situations, you'll want to use any federal loans available to you before turning to private ones. For one, the rates on federal loans are typically lower and more affordable (unless you have spectacular credit). You will also have access to things like income-based repayment plans and potential student loan forgiveness if you go into certain career paths.

"From a financial aid perspective, we recommend exhausting your federal loan options before taking out any private loans," Lopez says. "In general, federal student loans usually have more benefits than loans from banks or other private sources."

Federal loans are also easier to qualify for, so if you have bad credit (or no credit at all), they can also be a smart choice. 

When is a private student loan the best option?

Private student loans can be smart if you want to pick and choose your term, payment plan and interest rate type. With private loans, you can often choose between terms that range from five to 30 years or payments that are interest-only, flat fees or principal-and-interest combined. You can often pick between fixed and variable rates, too.

You might also consider private student loans if you or your cosigner have excellent credit. In this case, it's possible your interest rate may be lower on a private loan than a federal one.

Finally, if you have a cosigner and want them to have the option of being released in the future, you'll want to choose a private loan. Federal student loans don't allow for this.

"For a family that likes to have choices, wants a cosigner release option or has excellent credit to qualify for a lower rate, then a private loan can be a good option," Wang says.

When you might need both types of college loans

In many cases, you'll want a combination of both federal and private student loans — with the latter picking up the slack from the former. As Rubin explains, "The federal loans with the best borrower benefits — the Direct Stafford loans — have annual and aggregate loan limits, leaving students with financial aid gaps."

Private loans can be a good option for filling those gaps and covering the remaining costs of college.

If you do opt for this strategy, Rubin warns, "Always borrow responsibly. Understand your current debt, future earnings and ability to repay. Never borrow more than you need and be prepared to manage repayment once you finish your program."

Learn more about your student loan options here.

Talk to your financial aid office

If you're not sure which type of loan is right for your higher education costs, talk to your school's financial aid office. They can walk you through your options, the costs of each and their pros and cons.