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Private Student Loans vs. Federal Student Loans: Which Should You Choose?
Private Student Loans vs. Federal Student Loans: Which Should You Choose?
August 04, 2021 / Nadav Shemer
Private Student Loans vs. Federal Student Loans: Which Should You Choose?
August 04, 2021 / Nadav Shemer

Student loans fall into two categories: federal student loans and private student loans.

These are often seen as being in competition with each other, but the truth is that most students take out a combination of private and federal loans. The reason for this is simple. Federal loans only cover up to a certain amount of your annual tuition and fees. Private student loans cover the rest.

For a more detailed breakdown of the differences between private student loans and federal student loans, keep reading.

Federal Student Loans: How Much Can You Borrow?

If you are an undergraduate student, the maximum amount you can borrow in federal student loans ranges from $5,500 to $12,500 per year , depending on what year you are in school and your dependency status. If you are a graduate or professional student, you can borrow up to $20,500 each year.

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.

In order to decipher the table above, you need to know the difference between subsidized and unsubsidized loans and dependent and independent students.

Direct subsidized loans are offered to undergraduate students who can demonstrate financial need, measured by the difference between the cost of attendance at your school (COA) and your expected family contribution (EFC). While COA varies from school to school, your EFC is the same regardless of which school you attend.

Direct unsubsidized loans are offered to undergraduate students and graduate students, with no requirement to demonstrate financial need. Your school determines how much you can borrow based on your cost of attendance and other financial aid you receive, but the amount can not exceed the upper limit set by the federal government.

Dependency is determined by how you answer the questions on the FAFSA (Free Application for Federal Student Aid) form. If you are a dependent student , you will report your and your parents information. If you are an independent student , you will report your own information (and, if you are married, your spouse’s information too).

Private Student Loans: How Much Can You Borrow?

In 2020-21, the average cost of attendance (encompassing tuition and fees, room and board, books and supplies, transportation, and other expenses) ranged from $18,550 to $54,880, according to nonprofit organization College Board. The exact breakdown was:

  • 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

Clearly, there is a huge gap between the annual cost of attendance and the amount covered by federal loans. You may be able to fill the gap from your own (or your parents’) funds, scholarships, grants, or other sources. Private loans can also fill the gap. Most private lenders offer to cover up to 100% of the cost of attendance, provided you meet the eligibility requirements.

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

Federal loans usually offer the benefit of lower interest rates and not having to go through a credit check. For this reason, most student borrowers begin the quest of funding their college tuition by applying for federal loans.

Private loans have higher interest rates and require a credit check. However, they offer the advantage of covering up to 100% of your college expenses, minus any federal aid.

Bottom line: if you need to borrow the full amount of your annual tuition, fees, and additional costs, you should combine federal and private student loans.

By Nadav Shemer
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. Nadav writes for He enjoys writing about the latest innovations in financial services and products.
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