Federal or Private Student Loan? – Which Should You Choose?

Federal or Private Student Loan: There are two primary types of student loans available: federal student loans and private student loans.

Although it is a common perception that they are in competition with one another, the reality is that the vast majority of students take out both private and government loans in order to finance their education. The explanation behind this is quite straightforward. The amount of your annual tuition and fees that can be covered by federal loans are capped at a specified limit. The remaining costs are covered by private student loans.


Continue reading for a more in-depth analysis of the distinctions between federal student loans and private student loans.

Federal Student Loans: How Much Can You Borrow?

If you are a student enrolled in an undergraduate program, the maximum amount of money you are eligible to borrow from the federal government in the form of student loans can range anywhere from $5,500 to $12,500 per academic year, depending on the year in which you are enrolled and your dependency status. You have the ability to borrow up to $20,500 per academic year if you are a graduate or professional student.

Year Dependent students Independent students
First-year undergraduates $5,500 (no more than $3,500 in subsidized loans) $9,500 (no more than $3,500 may be in subsidized loans)
Second-year undergraduates $6,500 (no more than $4,500 in subsidized loans) $10,500 (no more than $4,500 may be in subsidized loans)
Third-year and beyond undergraduates $7,500 (no more than $5,500 in subsidized loans) $12,500 (no more than $5,500 may be in subsidized loans)
Graduates or professional student N/A $20,500 (unsubsidized only)
Aggregate limit – undergraduates $31,000 (no more than $23,000 in subsidized loans) $57,500 (no more than $23,000 in subsidized loans).
Aggregate limit – graduates or professional students N/A $138,500 (no more than $65,500 in subsidized loans) across all studies, including previous undergraduate loans.

You need to be familiar with the differences between subsidized and unsubsidized loans, as well as dependent and independent students, in order to make sense of the table that is located above.

Direct subsidized loans

Direct subsidized loans are made available to undergraduate students who can demonstrate a financial need. This requirement is met when the student’s estimated family contribution is less than the cost of attendance (COA) at their school (EFC). While the cost of attendance (COA) can change from school to school, your expected family contribution (EFC) remains the same.

direct unsubsidized loans

There is no requirement for students in either the undergraduate or graduate programs to demonstrate that they are in need of financial assistance in order to be eligible for direct unsubsidized loans. The maximum amount of money that can be borrowed by a student is capped by the federal government and is determined by the school the student attends. This maximum amount cannot exceed what the federal government has established as the maximum amount that can be borrowed.


How do you respond to the questions on the FAFSA Form?

How you respond to the questions on the FAFSA (Free Application for Federal Student Aid) form will decide whether or not you are considered dependent. If you are considered a dependent student, you are required to provide information about both yourself and your parents. In the event that you are an independent student, you are responsible for reporting your own information (and, in the event that you are married, the information of your spouse as well).

Private Student Loans: How Much Can You Borrow?

According to the non-profit organization College Board, the average cost of attendance in 2020-21 ranged from $18,550 to $54,880. This cost includes tuition and fees, lodging and board, books and supplies, transportation, and other expenses. The specific breakdown was as follows:

  • Public two-year in-district students – $18,550
  • Public four-year in-state students – $26,820
  • Public four-year out-of-state students – $43,280
  • Private four-year students – $54,880

It is quite clear that there is a massive discrepancy between the amount that is covered by federal loans and the annual cost of attendance. You might be able to make up the difference with money from your own savings (or those of your parents), scholarships, grants, or money from other sources. In addition, the shortfall can be filled through private borrowing. If you can demonstrate that you match the criteria for eligibility, most private lenders will pay up to one hundred percent of the total cost of attendance.

To qualify for a private student loan, you usually need to:

  • Be a US citizen or permanent resident, or have a cosigner who is a U.S. citizen or permanent resident;
  • Be enrolled in a degree program and be attending classes full-time, half-time, or less than half-time at an eligible school;
  • Meet the minimum credit score requirements, or have a cosigner who meets the minimum credit score requirements; and
  • Show satisfactory academic progress during school certification. Your lender will request this information directly from your school, with no need to provide any information yourself.

Bottom line

The interest rates on federal loans are typically lower, and applicants do not need to go through the process of having their credit checked. Because of this, the majority of prospective student borrowers start their search for funds to cover their educational expenses by submitting an application for a federal loan.

A credit check is typically required for private loans, as well as higher interest rates. On the other hand, they have the advantage of covering up to one hundred percent of your college costs, but this does not include any government aid.

In a nutshell, you should combine federal and private student loans in the event that you need to borrow the total amount necessary to cover your annual tuition, fees, and other associated charges.


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