Among several other federal student loan changes, interest rates increased again for the 2026-27 academic year. Undergraduate Direct Loan rates increased to 6.52%, while graduate Direct Unsubsidized Loans rose to 8.07%. The Direct PLUS rate is now 9.07%.
At the same time, private student loan lenders are offering competitive interest rates that are often lower than the federal rates for borrowers who have strong credit profiles, potentially making them more attractive to students and parents.
However, interest rates alone don't determine which type of borrowing provides the better deal, and understanding the differences can help you decide which option makes the most financial sense.
Why are federal student loan rates higher?
Federal student loan interest rates are set annually using a formula
based on the yield of the 10-year Treasury note (a type of U.S. debt security), plus a percentage amount determined by the type of loan. For loans first disbursed from July 1, 2026, through June 30, 2027, the rates are:
- Undergraduate Direct Loans include subsidized loans, for which the government covers interest during certain periods, and unsubsidized loans, for which interest generally accrues while you're in school.
- Graduate Direct Unsubsidized Loans are federal loans available to graduate and professional students without the interest subsidy.
- Direct PLUS Loans (PLUS Loans) are federal loans from the U.S. Department of Education that eligible parents of dependent undergraduate students can use to help cover education expenses not paid by other financial aid.
The new, higher rates don't affect any federal loans you may already have. Federal Direct Loan rates are fixed for the life of each loan once disbursed.
Additionally, eligible federal student loan borrowers who enroll in automatic payments by Sept. 30, 2026, can receive a temporary 1-percentage-point interest rate reduction through June 30, 2028.
Are more borrowers considering private student loans?
Higher federal rates are giving borrowers another reason to compare private student loans, but interest rates may not be the only factor driving increased interest.
Derek Brainard, CFP and Senior Director of Financial Education at AccessLex Institute, says, "I am seeing more students ask about private loans not just because federal rates are high, but because federal borrowing may no longer cover the full cost of attendance."
Private loans can help fill gaps left by reduced federal loan limits, and some well-qualified borrowers may receive rates below federal rates. However, private rates vary widely, and the type of borrower who'll receive the lowest rates generally needs strong credit, sufficient income or a qualified co-signer. Students with limited credit histories may receive substantially higher rates or be unable to qualify independently.
Federal vs. private student loans
Federal and private student loans both finance education expenses, but rates are only one of several important differences.
Why the lowest interest rate isn't always the cheapest choice
A lower interest rate can reduce monthly payments and total interest costs, but borrowers should also consider what they receive — or give up — with each loan type.
Stacey MacPhetres, the Senior Director, Education Finance at EdAssist by Bright Horizons, says, "While a lower interest rate is a consideration, it should not be the only consideration. First, in most cases, students cannot borrow private student loans without an eligible co-signer. If the intent is for the student to be the borrower alone, a private loan might not be the best option. Also, borrowers under the federal student loan program are afforded rights and protections under that program that might not be available through a private lender."
Federal student loan protections generally include deferment or forbearance options and certain death or disability discharges. Borrowers may also have access to federal repayment and forgiveness programs, including Public Service Loan Forgiveness (PSLF) and applicable income-driven repayment (IDR) options.
Private loan protections vary, and lenders are not required by law to provide the same benefits, though some lenders offer discharges in certain cases.
When a private student loan may make sense
Private financing may be worth considering when the combination of rates, terms and features fits your circumstances. Situations where a private loan might make sense include:
- You've exhausted scholarships, grants, savings and the federal borrowing you plan to use.
- You have strong credit or a qualified co-signer.
- You qualify for a private interest rate below your available federal rate.
- You're comfortable with the lender's repayment terms and borrower protections.
- You don't expect to rely on federal forgiveness or repayment benefits.
- You've reached the federal borrowing limits and must cover the remaining cost of attendance.
When a federal student loan may make sense
Even if a private lender offers a lower interest rate, federal loans may be the more appealing option when borrower protections and repayment flexibility are important to you. Federal financing may make more sense if:
- You don't have the credit or qualified co-signer needed for favorable private loan interest rates and terms.
- You expect to pursue PSLF.
- Federal repayment flexibility and payment-relief options may be useful later.
- Your future income or financial situation is uncertain.
- You want access to federal deferment, forbearance or applicable discharge protections.
How to compare federal and private student loans
Before choosing either type of loan, compare the actual financing available to determine which option better fits your needs.
1. Compare the actual interest rates.
Compare the federal borrowing rate against the private rates you realistically qualify for, and avoid making a decision based solely on a private lender's lowest advertised rate.
2. Calculate the total borrowing cost.
Compare monthly payments, origination fees (if applicable), loan terms and total borrowing costs. While a lower rate can save money, having a longer repayment term can still increase the overall cost of the loan.
3. Review repayment flexibility.
Compare repayment schedules and options for deferment, forbearance or other payment relief if you feel you could encounter financial difficulty.
4. Consider federal benefits you could lose.
Before choosing private financing, determine whether you could realistically benefit from federal forgiveness, discharge or repayment programs.
5. Read the private lender's terms.
Review and understand fixed versus variable interest rates, fees, co-signer requirements, release policies and what happens if you can't make payments.
What to consider before choosing
The best student loan isn't necessarily the one with the lowest interest rate. Instead, the best one is more likely the option whose overall costs, repayment requirements and protections best match your financial circumstances.
"Borrowers need to be sure they fully understand the implications of borrowing under either program. They should consider how much they want to borrow, the repayment terms, the flexibility of the program, the rights and benefits offered under both programs," MacPhetres says.
Comparing those factors can be especially important now that higher federal rates have made some private student loan offers more competitive.
Bottom line
Higher federal student loan rates can make private loans more attractive, particularly for borrowers who qualify for competitive private rates. However, a lower rate doesn't automatically make a private loan the best option. Compare rates, total borrowing costs, repayment terms, co-signer requirements and borrower protections before deciding which is best for you.
Federal vs. private student loan FAQs
Are private student loan rates lower than federal student loan rates?
Private student loan rates depend on the lender and borrower qualifications. Borrowers with strong credit or qualified co-signers may receive rates below current federal rates. However, borrowers with weaker credit profiles may receive considerably higher rates from private lending providers.
Do private student loans require a co-signer?
While borrowing requirements vary by lender, many students have limited income and short credit histories and may need a qualified co-signer to obtain private student loan approval or receive competitive rates.
What do I give up if I choose a private student loan?
Private loans generally don't include federal benefits such as PSLF, income-driven repayment options and deferment, forbearance and discharge protections. However, some private lenders provide their own borrower protections.
Can private student loan rates change after I borrow?
Fixed-rate private loans maintain the same interest rate for the duration of the repayment period, while variable-rate loans can increase or decrease based on the lender's specified benchmark and loan terms.
How do I compare private student loan offers?
Compare the annual percentage rate, interest rate type, repayment term, monthly payment, total borrowing cost, fees, co-signer requirements and borrower protections. Prequalifying with several lenders may help you compare potential offers without committing to a loan.
Are private student loans eligible for student loan forgiveness?
Private student loans generally aren't eligible for federal student loan forgiveness programs such as PSLF. However, some private lenders may offer separate discharge or assistance programs in some circumstances.
This article originally appeared on USA TODAY: Are higher federal student loan rates driving more to private loans?
