Best student loans for parents: PLUS vs. private

Picking a Parent PLUS loan or a private student loan can depend on your credit score and student status. (iStock)

Determining the most cost-effective way to borrow for school is essential as college graduates worry about repaying the collective $1.6 trillion in outstanding student debt they owe.

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Maxing out direct subsidized and unsubsidized loans first is advisable as these come with the best interest rates and most borrower protections. But those loans have limits. Once they're met, private loans and Parent PLUS loans are the primary options for undergrads.

What is a Parent PLUS loan and how does it compare to the best private student loans?

Parent PLUS loans are available through the Department of Education if students complete the Free Application for Federal Student Aid (FAFSA). Graduate students can also qualify for Grad PLUS loans in their own name but undergrads can't. However, while PLUS loans are federal student loans, they're available only if you don't have adverse credit – and they don't offer all the advantages direct loans do.

Borrowers can pause payments on PLUS loans by putting them into deferment or forbearance. And public service loan forgiveness (PSLF) is available after 120 on-time payments on an income-driven plan. There's also a choice of repayment plans, including graduated and extended plans to lower payments.

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Unfortunately, PLUS loans are costly – the Parent PLUS loan interest rate is currently 7.08 percent and there's a 4.236 percent origination fee. Likewise, parents can't qualify for income-based repayment or PSLF without consolidating their loans with the Department of Education first. Borrowers who extend their repayment time also end up paying more due to years of added interest costs (a student loan calculator can help you see how much more).

Conversely, private student loans are available to parents, undergraduates and graduate students from many lenders. Interest rates vary by credit score and there's often no origination fee with the best private student loans. You can even shop for a competitive rate and chose between fixed or variable rate loans – but you must qualify based on credit and income or get a cosigner to guarantee the loans.

Choosing between a Parent PLUS Loans vs. private student loans

If you have strong credit and qualify for a low-interest private loan with no origination fee, this option can be much more affordable than PLUS loans. However, loan forgiveness isn't available and there are fewer options in cases of financial hardship. Repayment terms won't change without refinancing and forbearance, if available, usually allows payments to be paused for a much shorter time.

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If you may need more time to repay debts or are at risk of an income loss, you may prefer the added protections PLUS Loans provide. And those who can qualify for loan forgiveness would be better off with PLUS loans -- as long as parent borrowers are willing to jump through some hoops to get it.

Finally, if your credit score isn't stellar, PLUS loans may be both more affordable and available. While private lenders require good or excellent credit to qualify for low-rate loans, PLUS loans are available at the same rate for any qualifying borrower, regardless of credit score.

While you cannot qualify for a PLUS loan with adverse credit -- narrowly defined to include things such as recent wage garnishments or large delinquent loan balances -- even borrowers with black marks on their credit history can obtain PLUS loans after documenting extenuating circumstances or getting an endorser who promises to repay the loan if they can't.

Research your options carefully to minimize your debt burden

Student debt is a big issue for most graduates and their parents – although some grads carry a bigger debt burden than others. When borrowing is unavoidable, comparing features of ​Parent PLUS versus private student loans can ensure students -- and the parents who help them -- will find the option best suited to meet their needs.