The question of whether college students should take out federal or private student loans to pay for their education may have just gotten harder to answer.
That’s due to a number of changes in President Donald Trump’s so-called “big beautiful bill” that will affect many current and future federal student loan borrowers.
The bill undoes several of the reforms President Joe Biden made during his time in office, such as protections for defrauded borrowers. It also eliminates repayment options and benefits like economic hardship deferrals that predate the Biden administration.
Historically, federal student loans have generally been a better deal for borrowers, Kate Wood, a lending expert at NerdWallet, tells CNBC Make It. The coming changes won’t necessarily make federal loans a “poor choice,” she says, but the decision may not be as obvious as it once was.
Lesley Turner, an associate professor at the University of Chicago Harris School of Public Policy, agrees. Turner has published several research papers on the role and impact of federal financing in higher education and previously served as an economic adviser within the Department of Education.
“By reducing the available protections for federal student loans, all else equal, that does make private student loans more attractive,” Turner says.
Federal vs. private student loans
If you’re weighing private versus federal student loans to pay for your education, there are generally five major factors to consider. Here’s a look at each.
1. Eligibility
If you’re enrolled at least part-time at an academic institution that participates in the federal direct loan program, you may be eligible to receive federal student loans.
You must submit a Free Application for Federal Student Aid to see if you qualify, but there are no income limits. You must be a U.S. citizen or permanent resident, have a valid Social Security number, not be in default on another federal student loan and have a high school diploma or equivalent credential.
Private student loans are subject to lender approval. It can be very difficult to get approved for a loan with poor or no credit history, but you can apply with a cosigner. You may have to meet enrollment, income and other eligibility requirements, depending on the lender.
2. Repayment plan options
Currently, federal student loan borrowers have several options for repayment plans that best fit their needs. There’s a standard repayment plan that keeps monthly payments fixed over the life of the loan and several income-driven repayment plans that are designed to make monthly payments affordable for lower-income borrowers. On the latter plans, borrowers have to certify their income annually, which can raise or lower monthly payments.
Trump’s policy bill narrows the number of available payment plans for future borrowers. Borrowers currently on the Pay as You Earn, Saving on a Valuable Education and Income-Contingent income-driven repayment plans will have to switch payment plans as the policy eliminates these options. But those borrowers will still have a standard and an income-driven repayment option.
Private student loan terms can vary by lender and loan, Wood says. You’ll typically have better options with federal loans as private loans typically don’t offer income-driven payment plans. Repayment timelines are often shorter for private loans too, ranging from eight to 12 years, compared with up to 25 years for federal loans.
3. Interest rates
All federal student loan interest rates are fixed for the life of the loan and determined by Congress each year. For the upcoming 2025-26 school year, they are 6.39% for undergraduate loans, 7.94% for graduate loans and 8.94% for parent and grad PLUS loans. Borrowers don’t need a credit history to qualify and a good or bad credit score won’t impact their interest rate.
Undergraduate borrowers with demonstrated financial need have access to direct subsidized loans. With these loans, the federal government pays the interest while the borrower is in school and during certain deferment periods. Unsubsidized and subsidized loans have the same fixed interest rates.
With private loans, however, your interest rate may be fixed or variable, depending on your loan terms. Lenders assign interest rates depending on the broader rate environment and borrowers’ creditworthiness.
It’s feasible some creditworthy borrowers — or borrowers who have a cosigner with good credit — could get a better interest rate with a private loan. But it’s fairly uncommon, Turner says.
She cites a 2012 Consumer Financial Protection Borrower study — “the best evidence we have,” she says — that found the average student loan borrower was always offered a higher interest rate from private lenders than the federal interest rate.
4. Flexibility
A major advantage of federal student loans has been the economic hardship and unemployment deferments that allow current borrowers to pause their monthly payments for a limited period of time when experiencing certain financial hardships, Wood says.
Currently, borrowers can receive economic hardship and unemployment deferments for up to three years and general forbearances for a maximum of 12 months at a time.
However, Trump’s policy reforms eliminate these options for future borrowers. Anyone who takes out loans after July 1, 2027 will be required to make monthly payments unless their loan servicer approves a general forbearance for situations like financial difficulties, medical expenses or changes in employment. The new policy will limit forbearances to a maximum of nine months in a two-year period.
“On one hand, that’s a lot worse than it used to be, but that’s probably still better than what a lot of private lenders are going to offer you,” Wood says.
There’s no law or regulation requiring private lenders to help you out if you fall on hard times while paying back your loan. Like credit card companies or other lenders, you may be able to negotiate a pause on your payments for a brief period if you have a good relationship with the lender and a history of on-time payments, but “it may come down to what your loan agreement allows,” Wood adds.
Plus, interest will likely continue accruing if you do successfully pause private loan payments, while interest may be paused for some federal loan forbearance periods.
5. Loan limits
Though federal student loans may offer better terms, you may be limited in the amount you can borrow. Undergraduate dependent borrowers have a lifetime limit of $31,000 and annual limits depending on what year of school you’re entering. The annual limits are as follows:
First-year undergraduate: $5,500Second-year undergraduate: $6,500Third year and beyond undergraduate: $7,500
Graduate and professional students have an annual loan limit of $20,500 and a lifetime limit of $138,500 including any amounts borrowed in undergrad. Grad students and parents of undergraduate students can also currently borrow up to the cost of attendance after any aid through PLUS loans, which have higher interest rates and slightly different protections than federal direct loans.
The new law doesn’t change the current loan limits for undergraduate students, but it does impose lower borrowing limits for graduate loans and parents taking out loans on behalf of undergraduate students by eliminating grad PLUS loans and capping parent PLUS loans for undergraduate students at $20,000 per student per year, up to an overall total of $65,000 per student.
After July 1, 2026, grad students will be able to borrow up to $20,500 a year and a maximum of $100,000 over the course of their studies — not including undergraduate borrowing — or $50,000 a year and $200,000 in total for professional studies like law or medicine.
For private loans, however, “ostensibly, no limits exist,” Wood says. The amount a borrower can receive is up to the lender’s discretion.
“The amount that they’re going to be open to lending you is going to depend on your characteristics as a borrower,” Wood says. “Is your credit strong? Do you pay your bills on time? Are you likely to pay back this loan? The stronger financially that you are, the more a lender will be open to lending you.”
The bottom line
Though the list of benefits may be shrinking, both Wood and Turner recommend students and families exhaust their federal student loan options first before turning to private lenders if they need to borrow to pay for school.
“For the majority of borrowers, federal loans will be the better product in terms of both interest rates and the protections that continue to exist after the [new Repayment Assistance Plan] goes into effect,” Turner says.
Not everyone will qualify for federal student loans, but you won’t know until you file a FAFSA. The FAFSA determines whether you qualify for federal grants and scholarships that you don’t have to pay back, as well as federal loans.
“Everybody should still be submitting your FAFSA,” Wood says. “You’re not committing to anything. You’re just finding out what you could get.”
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