With more than two-thirds of undergraduate students graduating with almost $25,000 in federal and private student loans, on average, education debt is unavoidable. It is then a question of not whether you should borrow to pay for your college education, because you will, but how to best optimize your debt.

As a general rule, federal loans are cheaper and have more flexible repayment options than private student loans. The interest rates on federal education loans are fixed, while the interest rates on private student loans are variable and are based on your credit score. Federal education loans are available to most students, while private student loans limit availability to borrowers with good credit.

Families should focus on the least expensive education loans. In most cases this means the loan with the lowest total interest paid over the life of the loan. Typically such a loan will have the lowest interest rates and fees. The following is a list of the major types of education funding, ranked from least expensive to most expensive. You should exhaust your eligibility for each type of funding before resorting to the next.

1. Scholarships and Grants
2. Work Study
3. Perkins Loans
4. Subsidized Stafford Loans
5. Unsubsidized Stafford Loans
6. PLUS Loans
7. Home Equity Loans
8. Private Student Loans
9. Credit Cards

Try to avoid being mislead by charts that compare the monthly payments on two loans that have different loan terms. Often lenders who offer more expensive loans will increase the loan term to reduce the monthly payment and make the loan seem less expensive. For example, consider a $20,000 Stafford loan at 6.8% interest and a 10 year term has a monthly payment of $230. A $20,000 private student loan at 10% interest with a 20 year term has a monthly payment of $193. Doesn't that make the private student loan seem cheaper? But if you look at the total interest paid over the life of the loan, the Stafford loan costs $7,619 while the private student loan costs $26,323. If you want to compare two different loans, use the same loan term to ensure that you are making an apples-to-apples comparison. For example, the same private student loan on a 10 year term has a monthly payment of $264 and total interest paid over the life of the loan of $11,716. It is clearly more expensive.

If you need a longer repayment term to reduce the size of the monthly payment, you can get extended repayment of up to 30 years, depending on the amount owed, by consolidating the federal loans. (You can also get extended repayment of up to 25 years without consolidating if you have $30,000 or more in debt with the same lender.) Stick with the shortest possible loan term to minimize your interest expense. After all, do you really want to still be repaying your own student loans when your children have graduated from college? Also, while increasing the loan term on a Stafford loan from 10 to 20 years may cut the monthly payment by about a third (34%), it more than doubles the cost of the loan (118% increase in total interest paid).

Given that private student loans are inferior to federal education loans, why might someone want to borrow a private student loan? There are a several of the more common reasons:

1. Independent students are not eligible for the Parent PLUS loan. If they have exhausted their Stafford loan limits, they may need to rely on private student loans as a supplemental source of education financing. Dependent students whose parents were denied a PLUS loan might also need to rely on private student loans. Graduate students who were denied a Grad PLUS loan might also need to rely on private student loans. But if a borrower is denied a PLUS loan because of an adverse credit history, they may find it difficult to qualify for a private student loan unless they have a creditworthy cosigner.
2. Some families may be unaware of their federal aid options, or may mistakenly believe that federal education loans are only available to poor students. The unsubsidized Stafford loan and the PLUS loan are available without regard to financial need. 
3. Some parents may be unwilling to borrow from the PLUS loan program, as the student is not obligated on this loan. Private student loans are student loans. If the parent cosigns a private student loan, the parent is also considered a coborrower, but at least the student is also responsible for repaying the debt.
4. Until July 1, 2008, the Parent PLUS loan entered repayment sixty days after full disbursement. This was in contrast with private student loans, which allowed parents to defer repayment of the loan by capitalizing the interest. (Parents could sometimes defer repayment on a Parent PLUS loan by obtaining a forbearance.) Now, however, parents can defer repayment on a PLUS loan while the student is in school and for six months after graduation. The interest continues to accrue and is capitalized.
5. If the student or cosigner has an excellent credit score (800+ FICO score), the interest rate on the private student loan may be competitive with the interest rate on the PLUS loan. But the interest rate on a private student loan is variable, so one must be concerned not just with the current interest rate, but how that rate might change over the life of the loan, which is typically two decades or more. Ultimately a private student loan will be more expensive. On the other hand, if the student intends to pay off the private student loan in full within a few years, the short-term savings on interest may be worthwhile. But few students have a rich uncle who can give them a graduation present to pay off their private student loans.
6. Some students will be ineligible for federal loans because of a failure to maintain satisfactory academic progress (e.g., a 2.0 or higher GPA). Or if the parents are going through a messy divorce, they might refuse to file the Free Application for Federal Student Aid because of privacy concerns.
7. Some community colleges have opted out of the federal loan programs to preserve eligibility for the Pell Grant. Students who need to borrow at these colleges (e.g., to pay for living expenses) have no choice but to rely on private student loans. Likewise, unaccredited schools are ineligible for federal student aid.
8. International students are ineligible for federal education loans.
9. Stepparents are only eligible to borrow from the PLUS loan program for as long as they are married to the student's biological or adoptive parent. Likewise grandparents, aunts, uncles and fiances are unable to obtain a PLUS loan. They can, however, cosign on a private student loan.