The second-most-important choice: federal or private student loans.

Once you commit to a college, your financial aid package is likely to lead to your second-most-important choice: Should you use federal or private student loans to cover your funding gap?

Private loans should be Plan B.

Private loans may seem like less of a hassle—you go to your bank or credit union and take out a single loan. The lender pulls your credit score, and in many instances since few college-bound teens have much of a credit history, they look to your parents to cosign.

Lately, some private lenders have even been offering more competitive interest rates and emphasizing that they lack the fees associated with federal loans. Private loans also lack limits on the amount that can be borrowed, though this can lead to borrowing more than you actually need.

While this all may sound good, the better choice is to start with federal loan programs first.

Why federal first.

The key advantage to borrowing from the government is that some federal loans are subsidized. If you can qualify to borrow an amount on a subsidized basis, the government actually pays the interest on the loan while you are in school. When you graduate, only the amount borrowed is due at graduation.

Unsubsidized federal loans also have advantages. Although interest accrues as soon as these loans are disbursed, it’s only payable after you leave school. For a private loan, repayment begins immediately after you receive your money—there are no deferrals while you are in school. This is why overborrowing through private lenders is not advisable.

Federal loans also carry a fixed interest rate and are available for consolidation, at lower rates, after you leave school. There are also a number of federal repayment programs you can choose from to make sure once repayment begins that your monthly amount is affordable based on your current financial circumstances.

Private loans, however, tend to be issued with variable rates—they can go up over time, increasing your overall cost. Nor do private loans come with the degree of mandatory protections like deferment and forbearance options, should health circumstances or job interruptions make repayment impossible.

Graduate student borrowing is an exception.

Unlike undergraduate borrowers and their parents, who are typically better served by the federal loan programs, graduate students may find private lenders to be the cheaper option under certain circumstances.

Specifically, if a graduate student already has a stellar credit rating and is confident that future income will be stable and high enough to support a short-lived repayment plan, a private loan could provide the cheaper option.

To see what federal loan programs you qualify for, fill out the Free Application for Federal Student Aid (FAFSA).

And before you commit to any loan—federal or private—contact an NFCC Certified Consumer Credit Counselor to get help determining what the best borrowing approach is for your circumstances.

Who is the NFCC?

Founded in 1951, the National Foundation for Credit Counseling® (NFCC®) is the nation's first and largest nonprofit dedicated to improving people's financial well-being.

NFCC members help millions of consumers like you through community-based offices located in all 50 states and Puerto Rico. Each NFCC member agency has earned our seal by adhering to high standards and ethical practices designed to help you achieve financial stability.

Funding for operations and services comes from an ever-changing combination of federal, state and local government grants, as well as donations from financial industry participants and private donors.

For more on the NFCC, visit

Thank you to our funders.

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