When it comes to paying for your higher education, the options can seem overwhelming. Though grants, scholarships, and student loans can make college more accessible, most people end up taking on student debt as a way to bridge the financial gap.

Understanding the difference between federal, private, and state student loans can help guide you to making the best of a bad situation.

There are three main types of student loans: federal student loans, private student loans, and state student loans. Though they all accomplish the same goal of helping you pay for college, each has its own set of benefits and drawbacks that you need to understand before taking on debt.

Federal Student Loans: Freely Available and Flexible

Federal student loans are available for anyone who needs help paying for higher education. These student loans are currently issued only by the U.S. Department of Education under the Direct Loan program, though private lenders were previously empowered to originate them under a now-discontinued program.

Federal student loans come with fixed interest rates set annually by Congress, are available regardless of credit, and there’s no requirement for borrowers to get a co-signer. These loans offer tremendous flexibility in repayment plans, as well as forgiveness and cancellation options to those who qualify. be adjusted to fit your budget, and in some cases, you may even qualify for deferment or a total discharge of your loan if you meet certain criteria.

Though there are annual borrowing limits, all you need to do to apply is complete the Free Application for Federal Student Aid (FAFSA®) form.

Private Student Loans Can Close the Gap

Private student loans offer students an option for additional financial support when federal loans just don’t cut it. Private student loans are offered by private lenders and banks, and approval is governed entirely by the lender’s internal procedures.

Because these loans aren’t covered by federal regulations governing higher education, they usually come with significantly higher interest rates than federal loans. Private student loans also typically require a cosigner for approval. According to reports, over 90% of private student loan borrowers have to get a cosigner in order to qualify for their desired loan amount.

The only benefit of private student loans is that enforcement is governed by the same rules as any other private debt such as credit cards and personal loans. This means private student loans are subject to a statute of limitations, and a lender must typically have a judgment to start a wage garnishment or seize assets.

What About State Student Loans?

Some states offer a lesser-known third option – state student loans. These are often restricted to residents or those attending school within the applicable region and have terms that vary considerably.

State student loans can provide critical financial support that bridges the gap when Federal Direct Loans don’t cover the full cost of attendance. Though they often feature less attractive rates than those associated with their federal counterparts, state student loans may be a more attractive option than private student loans.

Programs vary in scope and size, and not all states offer their own student loan programs, so make sure to research your options carefully.

Understand Your Options to Make the Right Choice

Taking out a student loan is a decision that will affect your finances for years to come. That’s why it’s so important to make sure you understand the terms before signing on the dotted line.

When borrowing for your education, federal loans should always be your first choice. Look at state and private options only after you’ve exhausted your federal sources. Loan rates, payment deadlines, and credit history requirements for private student loans can all vary from lender to lender, so take the time necessary to do your research. Don’t rush into anything without having a full understanding of what you’re committing to – it could end up costing you much more in the long run.


Meet Jay

Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.

I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.

I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.

I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.