4 things to know about federal vs. private student loans

The college application system seems designed to confuse families.

Your student starts the application process in hopes of gaining admission to their dream school. Meanwhile, you’re filling out the FAFSA, which calculates the Student Aid Index (SAI) — what you’ll be expected to pay — based on your adjusted gross income from two years prior.

Then, when acceptances and financial aid packages start arriving in March and April, you have only a month or two to make one of the biggest financial decisions you’ll ever have to make.

Grants and scholarships will defray the cost, you hope, but when that first tuition bill comes due, hope is no longer an option. This is when parents turn to college loans, either through the federal government or private sources, such as banks and credit unions.

Higher education is a business, and it doesn’t always look out for the consumer’s best interests. Here are five things you need to know about loans when deciding what to do.

Variable vs. fixed interest

The interest rate on a federal loan will remain fixed for the life of the loan, and the payments will never vary, making it easier to budget.

Private lenders often offer attractive introductory rates as they market loans and refinancing. These interest rates generally are lower than the rate for federal Parent PLUS loans, currently 8.94% — and that can make a big difference in the size of monthly payments.

However, private loans often have origination fees as high as 5%. After the introductory period, the interest rate on a private loan may rise and become variable rather than fixed. This can cause the monthly payments to increase, so carefully review the terms and conditions before signing on the dotted line.

Loan forgiveness

When was the last time a bank forgave a car loan or mortgage? The same is true for student loans. Federal loans, however, have several provisions for loan forgiveness. Here are a few forgiveness scenarios:

Death: If the Parent PLUS borrower or the child for whom they took out a loan dies, the loan is forgiven.

Total and permanent disability (TPD): If the parent borrower becomes totally and permanently disabled, their loans may be discharged.

Public service loan forgiveness: This is intended for borrowers who are employed full-time by a government agency or nonprofit. The process involves consolidating all of the borrower’s Parent PLUS loans into a direct consolidation loan and switching to the income-contingent repayment, or ICR, plan. After 10 years of on-time payments, the balance of the loan is eligible for forgiveness.

These provisions can be very complicated, so it’s often best to get advice from a college financial planning expert.

A new cap on Parent PLUS loans

Up until now, the Parent PLUS loan was limited only by the cost of attendance. A parent could borrow hundreds of thousands of dollars over four years while colleges kept raising tuition, fees and room and board.

Starting July 1, 2026, however, a provision in the administration’s 2025 budget bill caps Parent PLUS loans at $20,000 a year with a lifetime maximum per child of $65,000.

Whether this will pressure colleges into lowering the cost of attendance remains to be seen. What it does mean is that parents may have to supplement federal loans with private loans. And it may further limit a student’s choice of colleges.

Sometimes, a private loan makes sense

If you have an excellent credit history, adequate and consistent income, not a lot of debt and a healthy emergency fund, a private loan can be a good choice — especially if you can pay it back in the shortest possible amount of time.

This may take some rebalancing and reallocation of assets to create the necessary cash flow, but paying off a college loan within five years rather than 10 or 20 is a worthy goal.

Of course, the best way to help pay for college is to maximize grants and scholarships — money that doesn’t have to be paid back. Free money, as I like to call it.

Remember that the student aid index is based on your AGI from two years prior to the application year. If your child will be starting their junior year of high school in 2026, they will be applying to college for the 2028-29 academic year. Now is the time to sit down with your financial adviser and position income and assets in order to improve financial aid eligibility.

• Brian Safdari is a Certified College Planning Specialist. He and his team have assisted more than 7,500 students nationwide on their college journey using their exclusive My College Fit System and financial planning tools. For more information, contact Brian@collegeplanningexperts.com or visit collegeplanningexperts.com.