Comparing Federal, Nonprofit, and For-Profit Student Loans

Comparing Federal, Non-Profit, and For-Profit Student Loans
Brazos Staff

BIG Ideas:

  • There are three main types of student loans: federal student loans offered by the U.S. government, private student loans provided by mission-driven, nonprofit organizations and private student loans provided by for-profit lenders.
  • Borrowers should try to exhaust federal student loans first because they offer flexible repayment options and built-in protections.
  • Private loans from nonprofit lenders may offer lower rates, fewer fees, and more flexible terms than loans from for-profit private lenders. 

College will test you – literally and figuratively. From final exams and paper deadlines to cramped dorm spaces and roommates, there’s always something new to experience and learn from. For many students, though, one of the biggest tests takes place before you even set foot in the classroom: figuring out how to pay for college.

Because, as you probably know by now, college is expensive.

And while student loans can help make college possible and more affordable, understanding the borrowing options available can feel overwhelming. So, before we get into the ins and outs of the different types of student loans, let’s take a brief test to see where your knowledge stands right now.

Ready? Let’s get crackin’:

Question 1: Who offers student loans?

  1. The federal government
  2. Banks, credit unions, and other lenders
  3. Nonprofit organizations
  4. All of the above 

Answer: D – all of the above. 

Question 2: How many types of student loans are there?

  1. 1
  2. 2
  3. 3
  4. None of the above 

Answer: C – There are actually three types of student loans: federal student loans, private student loans from nonprofit lenders, and private student loans from for-profit lenders. 

Question 3: True or False: All private lenders are the same.

  1. True
  2. False

Answer: B – private student loans can vary significantly from lender to lender.

If you aced the exam, congratulations. If you need a little extra help, that’s why we’re here. Let’s dive a little deeper into your borrowing options and look at a student loan comparison to help you make the right choices for your situation.

The Three Types of Student Loans

When you learn about student loans, you’re often taught that there are basically two types: federal student loans and private student loans. In actuality, though, there are really three types of loans:

  • Federal student loans are offered by the U.S. government.
  • Private nonprofit student loans offered by mission-driven organizations.
  • Private student loans offered by for-profit lenders or non-mission-driven organizations.

Now let’s go into more detail about each type of loan to help you better understand the differences between federal and private student loans and make a smarter student loan comparison. 

Federal Student Loans

Federal student loans are loans offered by the U.S. Department of Education. To qualify, you’ll need to complete the Free Application for Federal Student Aid (FAFSA). Unlike private student loans, federal loans for undergraduate students are generally not based on creditworthiness, which can make qualifying easier. They offer:

Because of these benefits, students are generally advised to exhaust federal student loan options first. However, federal loans are subject to annual and lifetime borrowing limits, which can leave a gap between what you can afford, how much you can borrow, and the full cost of attendance. That’s when you may turn to private student loans. But borrower beware: not all private lenders are not alike.

Private Student Loans From Mission-Driven, Nonprofit or State-Based Lenders

If you need to fill the gap where federal loans leave off, your next step may be to look at private student loans from nonprofit or state-based lenders. Unlike for-profit lenders, these organizations are mission-driven and focused on making higher education more affordable, often prioritizing lower interest rates and borrower-friendly terms over profits.

Most nonprofits and state-based lenders operate regional programs designed to serve students and families within a particular state or students attending school in that state. Because of their regional focus, they may not be as widely recognized as large national lenders that market student loans nationwide. However, these organizations can have a meaningful impact on affordability, especially when it comes to interest rates.

Research from the American Action Forum found that nonprofit and state-based lenders issued a substantially larger share of loans in lower interest rate tiers compared to for-profit lenders. According to the report, 88% of loans from nonprofit and state-based lenders carried interest rates between 5% and 8.99%, while only 8% were issued at 9% or higher. By comparison, 69% of loans from a major for-profit lender fell into the 9%+ range.1

That interest rate difference can have a meaningful financial impact. For example, on a $30,000 loan with a 10-year term, a 7% interest rate results in about $348 per month and roughly $11,700 in total interest. At 11%, the monthly payment rises to about $413, with nearly $19,600 in total interest. That’s an increase of almost $8,000 over time.

Also, because many nonprofit and state-based lenders are funded through tax-exempt bonds that support higher education affordability, they may offer benefits such as:

  • Lower fixed or variable interest rates.
  • Reduced or no fees.
  • More flexible repayment terms.

Some nonprofit lenders may also provide borrower-friendly features like cosigner release, deferment or hardship assistance, though benefits and protections vary by lender and should be compared carefully. Keep in mind that while private student loans from nonprofit lenders may offer more favorable pricing and some benefits, they do not provide the same protections as federal student loans.

Finally, approval for nonprofit private student loans and what interest rate a borrower receives typically depends on creditworthiness, income, and whether a borrower applies with a cosigner.

Private Student Loans From For-Profit Lenders

In addition to federal student loans and nonprofit or state-based private loans, there are also private student loans offered by for-profit organizations. These organizations typically include banks, online lenders, and other financial institutions. Unlike nonprofit or state-based lenders that are focused on affordability, for-profit lenders are primarily focused on generating profits.

While some for-profit lenders may advertise low starting rates, the actual rate a borrower receives depends heavily on credit history, income, and cosigner strength, often resulting in a much higher final rate than what is advertised. This makes comparison shopping especially important, especially if there’s a wide spread between the lowest and highest advertised rates.

If you decide to explore for-profit private student loans after exhausting federal aid, it’s critical to carefully compare lenders side by side since not all for-profit lenders are the same when it comes to interest rates, fees, and repayment terms. Be sure to pay special attention to:

  • The range of interest rates offered, and whether they’re fixed or variable.
  • Fees, including origination or late payment fees.
  • Repayment terms offered.
  • Available borrower protections, such as deferment or hardship options.
  • Cosigner release policies.

Like private student loans offered by nonprofit lenders, private student loans from for-profit lenders do not offer the same protections as federal student loans and approval typically depends on creditworthiness, income and cosigner strength.

Do Your Homework

As with any test, figuring out how to afford college requires preparation. Choosing the right loans will not only make college possible but also may help you save significantly over time. Here’s how to prepare:

  • Understand the different types of student loans available to make smarter borrowing decisions.
  • Complete the FAFSA to apply for federal aid.
  • Exhaust all federal student loans and aid options before seeking private student loans.
  • Apply for scholarships and grants, which are essentially free money that can reduce the amount you need to borrow.
  • Shop for nonprofit private student loans first to take advantage of potentially lower rates and fewer fees. Remember, nonprofit lenders are mostly state based organizations so be sure to look for the nonprofit lender in your state.
  • Compare rates, fees, repayment terms, and borrower protections from each lender as part of your student loan comparison.
  • When comparing private lenders, always consider the overall range of interest rates offered, especially if there’s a wide gap between the highest and lowest rates.
  • When searching for lenders, be cautious with “best student loan” type websites, as many are paid listings that may exclude nonprofit lenders and do not always provide unbiased, comprehensive comparisons.

And of course, one of the best ways to make college affordable is to set a realistic budget and choose a school that fits your financial situation. It’s one of the smartest financial decisions you can make.

Welcome to Brazos: A Trusted Nonprofit Lender That’s Proud to Make Education Possible

For more than 50 years, Brazos Higher Education has helped students and parents finance the cost of college. As a Texas nonprofit private lender, we offer competitive rates that can help make college possible and more affordable. Contact us today.

1American Action Forum, “Student Loan Lenders: How Do Different Options Stack Up?”