Federal Versus Private

The first decision, and the largest, is whether to borrow from the federal government’s Direct Loan program or from a private lender. The federal program is not always the cheaper option, but it carries protections no private lender can replicate.

What federal student loans give you that private loans do not.

• Income-driven repayment. Federal loans qualify for IDR plans (currently IBR for legacy borrowers, RAP for new borrowers post-July 2026). Payment scales to income, with eventual forgiveness of remaining balance after 20–30 years. Private loans do not offer this; in distress, you negotiate with the lender or default.
• Discharge on death or permanent disability. The remaining federal loan balance is discharged at the borrower’s death (or in cases of total and permanent disability), not transferred to the estate. Private lenders typically pursue the estate, sometimes co-signers as well.
• Deferment and forbearance. Federal loans pause for graduate study, unemployment, and economic hardship. Interest may continue to accrue (on unsubsidized loans), but payments stop. Private lenders rarely match this.
• Public Service Loan Forgiveness for borrowers working in qualifying public-sector or nonprofit jobs (see below). Not available on private loans.
• Borrower-friendly bankruptcy treatment is not on this list. Both federal and private student loans remain almost impossible to discharge in bankruptcy without proving “undue hardship” under the Brunner test ( Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987)) — a standard so demanding that successful discharge of student loans is statistically rare.

What private student loans sometimes give you that federal loans do not.

• Lower rates for borrowers with excellent credit and a co-signer. The federal program does not credit-price; every borrower pays the same statutory rate for a given loan type and year. A prime borrower with a parent co-signer can sometimes beat the federal unsubsidized rate by 1%–2%.
• Higher borrowing limits. With OBBBA’s new federal lifetime caps (see below), private loans may be the only path for high-cost professional schools whose total cost of attendance exceeds the federal limit.

The default for high-income families. Borrow federal first, refinance private later — but only after the borrower has confirmed they will not need IDR or PSLF. Refinancing a federal loan into a private loan is irreversible and forfeits every federal protection above. For a parent or graduate with strong credit and high expected income, the rate arbitrage on refinancing federal loans into a private 5%–6% loan can be meaningful, but only if the borrower is certain the federal protections will not be needed. A medical resident with a likely PSLF pathway who refinances into private debt in residency has destroyed five-figure forgiveness optionality for a few hundred dollars of monthly savings.