When you weigh federal vs private student loans, borrow federal first. Federal Direct Loans for students have fixed rates, need no credit check or cosigner, and come with income-based repayment and forgiveness options set by law. Most private loans need a cosigner, often carry variable rates, and offer little flexibility if your income drops. The Consumer Financial Protection Bureau’s own guidance says that “for most student borrowers, federal Direct loans are the better option.”
The 2025 federal law changed this calculation for some families. From July 1, 2026, graduate students and parents face new federal borrowing caps. That means more families will run out of federal eligibility and consider private loans. Below is what each type offers, what changed, and what to check before you sign anything.
Federal vs private student loans at a glance
| Feature | Federal Direct Loans (students) | Private student loans |
|---|---|---|
| Who lends | US Department of Education | Banks, credit unions, other lenders, some states and schools |
| Credit check | None for subsidized/unsubsidized loans; PLUS loans have a credit check | Yes; most require a cosigner without positive credit history |
| Interest rate | Fixed for the life of the loan, set by law each year | Often variable; set by the lender based on credit |
| Income-driven repayment | Yes (Repayment Assistance Plan for new loans) | Not required by federal law |
| Public Service Loan Forgiveness | Eligible Direct Loans qualify | No |
| Subsidized interest | Available to undergraduates with need | No |
The contrast in the table comes from the CFPB’s guide to choosing a student loan. It notes that federal loans have no credit check except for Parent PLUS, and fixed interest rates that never change. It also warns that private loan “interest rate and monthly payment could change with little warning.”
Current federal interest rates
Federal rates are fixed for each loan, based on the year it was first paid out. Figures are from Federal Student Aid announcements GENERAL-26-33 and DL-25-03.
| Loan | July 1, 2025 to June 30, 2026 | July 1, 2026 to June 30, 2027 |
|---|---|---|
| Direct Subsidized/Unsubsidized, undergraduate | 6.39% | 6.52% |
| Direct Unsubsidized, graduate/professional | 7.94% | 8.07% |
| Direct PLUS (parents; grad students still eligible) | 8.94% | 9.07% |
A private lender may advertise a lower starting rate than these. Before you compare, check whether the private rate is variable, what credit score it assumes, and what you would give up. A low rate is worth less if it can rise, or if the loan has no option to lower payments when money is tight.
What changed on July 1, 2026
Public Law 119-21, the July 2025 reconciliation law, kept undergraduate annual limits the same. It tightened graduate and parent borrowing. The Department’s final regulations of May 1, 2026 set these rules for periods of enrollment beginning on or after July 1, 2026:
- Grad PLUS ended for new borrowers. The law removed the authority to make new Graduate PLUS Loans. Students who were enrolled as of June 30, 2026, and had a Direct Loan for that program before July 1, 2026, keep the old limits for a limited time.
- Graduate students: $20,500 a year and $100,000 in total in Direct Unsubsidized Loans.
- Professional students: $50,000 a year and $200,000 in total.
- Parent PLUS: $20,000 a year and $65,000 in total per dependent student. Federal Student Aid’s LOANS-26-05 says the aggregate applies per dependent student, not per parent borrower.
- Lifetime cap: $257,500 for most borrowers across undergraduate, graduate and professional federal loans. Parent PLUS loans are not counted.
Undergraduate limits are in our guide to subsidized vs unsubsidized loans. Graduate students will find the full picture in how to pay for graduate school.
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The protections you give up with a private loan
Payments tied to income
For federal loans made on or after July 1, 2026, the Repayment Assistance Plan sets payments as a share of adjusted gross income, minus $50 for each dependent. It waives unpaid interest when an on-time payment does not cover the interest due, and forgives any remaining balance after 360 qualifying payments over at least 30 years. All of this is in the final rule. The other new federal option, the Tiered Standard plan, has fixed payments over 10 to 25 years, depending on your balance. Private lenders set their own terms, and no federal law requires them to offer either of these.
Public Service Loan Forgiveness
Payments made under the Repayment Assistance Plan count toward Public Service Loan Forgiveness, according to Dear Colleague Letter GEN-25-04. Private loans are not eligible, so anyone heading into government, teaching or nonprofit work loses that path by borrowing privately.
No cosigner on the line
Federal student loans do not need a cosigner. Most private student loans do unless the borrower has positive credit history, according to the CFPB. A cosigner is legally responsible for the debt. That puts a parent’s or relative’s credit at risk for years.
What private lenders check
Private lenders decide based on credit, not financial need. Expect them to look at your credit history, your cosigner’s credit and income, and how much you plan to borrow. Many also confirm with your school how much you can borrow, so you do not take more than the cost of attendance minus your other aid.
Federal PLUS loans also involve a credit check, but a narrower one. The Department reviews the credit report for adverse history, such as debts over $2,085 that are 90 or more days delinquent. Having no credit history is not a reason for denial, according to the FSA Handbook. If a parent is denied a PLUS loan, a dependent undergraduate can borrow more in federal unsubsidized loans, up to the independent-student limits.
If a parent is turned down for PLUS
A PLUS denial is not always final. The Handbook says an applicant with adverse credit can still get a Direct PLUS Loan by obtaining an endorser, who agrees to repay if the borrower does not, or by documenting extenuating circumstances. In either case the parent must also complete PLUS Loan Credit Counseling. Weigh this against the alternative. If the parent does not reapply, the student’s own federal unsubsidized eligibility goes up, and that loan is in the student’s name with the student-loan rate and protections.
The order to borrow in
- Grants, scholarships and work-study. Search our scholarship guide before you borrow.
- Federal Direct Subsidized Loans, if you qualify.
- Federal Direct Unsubsidized Loans.
- A school tuition payment plan, which spreads costs over the term.
- Parent PLUS, within the new $20,000 annual cap, after weighing the parent’s ability to repay.
- Private loans, only for a remaining gap, after you compare fixed vs variable rates, cosigner release terms and hardship options in writing.
Before taking any private loan, ask your financial aid office whether you have accepted every federal dollar you are eligible for. Unused federal eligibility is the most common reason a private loan turns out to be unnecessary.
Sources
- Consumer Financial Protection Bureau: Choose a Student Loan
- Federal Student Aid: GENERAL-26-33, Interest Rates for Loans First Disbursed July 1, 2026 to June 30, 2027
- Federal Student Aid: DL-25-03, Interest Rates for Loans First Disbursed July 1, 2025 to June 30, 2026
- Federal Register (US Department of Education): Federal Student Loan Program Final Regulations (May 1, 2026)
- Federal Student Aid: LOANS-26-05, NSLDS Eligibility Processing Updates
- Federal Student Aid: Dear Colleague Letter GEN-25-04
- Federal Student Aid Handbook: Student and Parent Eligibility for Direct Loans