When people say "student loans," they're describing two very different things wearing the same name. Federal loans come from the government and carry a set of built-in protections. Private loans come from banks and lenders and are priced like any other consumer debt. Telling them apart is one of the highest-value things a borrower can understand, because the difference shapes not just the interest rate but what happens years later if money gets tight.
This lesson lays out how each type works and where they diverge. It's educational only — describing how the loans are structured, not telling anyone which to take.
Two flavors of federal loan: subsidized and unsubsidized
Federal student loans for undergraduates come in two main types, and the difference between them is entirely about who pays the interest while a student is still in school.
| Subsidized | Unsubsidized | |
|---|---|---|
| Based on financial need? | Yes | No |
| Who pays interest in school? | The government | The borrower (it accrues) |
| Interest while deferred? | Government covers it | Keeps accruing on the borrower |
| Same fixed rate? | Yes | Yes |
With a subsidized loan, the government pays the interest while the student is enrolled at least half-time and during certain other periods, so the balance doesn't grow during school. With an unsubsidized loan, interest starts accruing the day the money is disbursed — even while the student is still in class — and that unpaid interest can later be added to the balance. Both typically carry the same fixed rate; the subsidy is the difference. Because subsidized loans cost less over time, they're generally the first federal dollars used when a borrower qualifies.
What federal loans protect that private loans usually don't
The reason federal loans are generally exhausted before private ones isn't only the rate — it's the safety net. Federal loans come with repayment flexibility and relief options written into law. Private loans are contracts with a lender, and what they offer varies, but they typically carry far fewer of these protections.
| Feature | Federal loans | Private loans |
|---|---|---|
| Rate type | Fixed by law | Fixed or variable, set by lender |
| Approval based on credit? | Generally no | Yes — credit score driven |
| Cosigner usually needed? | No | Often, for students with thin credit |
| Income-driven repayment | Available | Rare |
| Deferment / forbearance | Standardized options | Lender's discretion |
| Forgiveness programs | Some exist (e.g. public service) | Almost never |
Income-driven repayment ties a federal monthly payment to what a borrower earns, so a low income means a smaller payment. Deferment and forbearance let a borrower pause payments during hardship under defined rules. And certain forgiveness programs can cancel a remaining federal balance after years of qualifying payments. None of these are guaranteed to fit every borrower, and the details change — but they exist as standardized options, which is the whole point. Private loans rarely offer their equivalent.
How private loans are priced
A private loan is underwritten like a car loan or a credit card: the lender checks credit and sets a rate based on risk. Because most students starting college have little or no credit history, private loans frequently require a cosigner — usually a parent or relative whose stronger credit backs the loan. That has real weight: a cosigner is fully on the hook for the debt, and the loan typically shows up on their credit too, so a missed payment can mark both people.
Private rates can be fixed or variable. A fixed vs. variable rate choice matters here: a variable rate can start lower and then climb if benchmark rates rise, which changes the payment over a multi-year loan. Because the rate is credit-based, a borrower with strong credit (or a strong cosigner) might be offered a competitive rate, while a thin file gets a high one — the same spread the credit-scores track describes for any borrowing.
Putting the order together
The structure explains the conventional sequence borrowers are pointed toward: free money first, then subsidized federal loans, then unsubsidized federal, and private loans only for a gap the federal options can't cover. It's not a moral rule — it's that each step down the list generally costs more or protects less. Federal loans also have annual and total borrowing limits, which is one reason some families reach for private loans at all.
The loan payment calculator can show how a given rate and balance translate into a monthly payment, and the interest, APR & amortization lesson walks the underlying math in detail. None of this is a recommendation about a specific loan — it's the map of how the choices differ.