Student loan debt in America now tops $1.2 trillion, and more than 70% of U.S. college graduates from the class of 2014 had to borrow for their bachelor’s degrees.

Among those graduates, their average student loan burden was $33,000, according to Mark Kantrowitz, a college-financing expert who heads and who has done an analysis of recent government data. That makes those 2014 degree holders the most indebted class ever—an unfortunate distinction, and one that will probably be topped by future grads in the class of 2015, and then 2016, if current trends continue.


Fortunately, President Obama is expected this week to unveil a series of measures that would ease the financial burden of those with student loans.

Among the plans: Obama is calling for more borrowers with both federal and private student loans to be able to refinance into loans with lower interest rates. The President also wants to expand a 2010 law that allows borrowers to cap their student loan repayments at 10% of their income.

As I explain in my forthcoming book, College Secrets: How to Save Money, Cut College Costs and Graduate Debt-Free, you can definitely borrow responsibly with student loans if you use the following six strategies.

1. Borrow as a last resort, not a first choice

2. Set borrowing limits and stick to them

3. Always get federal loans first

4. Understand all your loan options

5. Pay a little along the way

6. Stay out of default

Let’s evaluate each strategy and see how some basic knowledge about student loans can help you finance a college education the proper way.

1. Borrow as a last resort, not a first choice

Far too many students and parents facing college bills borrow needlessly for higher education, simply because they make borrowing a first choice rather than a last resort.

Just because a tuition payment is looming, or you need to buy costly school books next semester and you don’t have the cash on hand, doesn’t mean you should automatically resort to borrowing and going into debt to cover those expenses.

Before you consider student loans, make sure you’ve pursued a range of other options, such as:

  • Scholarships and grants
  • Paid internships
  • Work study or part-time work
  • Your own resources
  • Parental or family resources

Tapping into each one of these options can help you avoid excessive student debt.

2. Set borrowing limits and stick to them

There is no universal agreement on how much debt is “reasonable” or how much student loan debt is “excessive.” But many college pros do offer insights into how to evaluate potential borrowing, and how to avoid going overboard with student loans.

“A good rule of thumb is to not have more debt than what you expect your first year salary is going to be,” says Kalman Chany, author of Paying for College Without Going Broke and the President of Campus Consultants Inc., a Manhattan-based company that helps families maximize financial aid eligibility.

3. Always get federal loans first

If you take on student loan debt for college, there are two types of loans: federal loans and private loans. You always want to get federal loans first, because these loans usually have fewer fees, lower interest rates, and more flexible options, such as better loan forgiveness or loan deferment plans.

Congress sets the interest rates on federal student loans annually. For the coming school year, undergraduate loans first disbursed between July 1, 2014 and June 30, 2015 will carry fixed interest rates of 4.66%. Direct unsubsidized loans for graduate students currently will carry a 6.21% rate. For Direct PLUS loans, which are available to parents or graduate students, the fixed loan rate is 7.21%.

Again, these rates change each year. So once July 1, 2015 rolls around, double-check for the most up-to-date rates.

4. Understand all your loan options

Taking the time to understand what types of loans are available, and what your responsibilities are for paying back those loans, can help you make the most informed decisions about financing your college education.

There are several different types of federal student loans: Direct Subsidized and Direct Unsubsidized Loans; Direct PLUS Loans; and Federal Perkins Loans.

Thanks to government legislation passed in 2013, there is currently a cap on federal student loan rates at 8.25% for undergraduate Stafford loans, 9.5% for graduate Stafford loans and 10.5% for Direct PLUS loans.

Federal PLUS Loans let parents or graduate students borrow for college. Parents must have decent credit to get a PLUS loan and repayment begins 60 days after the last disbursement of the loan; the repayment period can last up to 10 years. Interest and principal may also be deferred in some circumstances. Since PLUS loans are based solely on good credit, a parent’s income and personal debt are not factors in the loan approval process.

5. Pay a little along the way

Federal loans may be subsidized, meaning the government is paying the interest on those loans while you’re in school. This helps you avoid accruing interest for the years before you graduate.

However, with unsubsidized federal loans and private loans, you don’t get that subsidy. So if you don’t make student loan payments immediately after getting those loans, the interest gets capitalized—or added to—your original student loan balance. This is how students who borrow, say, $20,000 over four years wind up having a total student loan debt of more like $27,000 upon graduation.

To avoid having all that interest accrue, the smart strategy is to pay a little at a time—at least on unsubsidized loans—right after you take them. At a minimum, pay the interest on those loans so that it doesn’t pile up unnecessarily, adding to your post-graduation student loan debt.

6. Stay out of default

Once you graduate, leave school, or drop below half-time enrollment, you have a six-month grace period before you are required to begin repaying your student loans.

During this grace period, your loan servicer should send you payment information advising you of when your first monthly payment is due. Don’t ignore that notice! If you do, you could set yourself up for falling into delinquency and ultimately default with your student loans.

When you miss one or more student loan payments, your loan will become delinquent. But if you don’t make your monthly student loan payments for 270 days, the loan goes into “default” status.

If you default, the government has the right to snatch any federal tax refunds you were expecting. The feds can also garnish up to 15% of your net income and report your default to the credit bureaus, hurting your credit score.

By taking the six steps outlined above, however, you can avoid those problems and sidestep the trap of massive student loan debt. If you make it through college without student loans—or at least manage to keep college debt to a minimum—that’s one great way to truly make your education pay off professionally and financially too.