What is the best approach to handling loans?

It took me 10 years to finally pay off my student loans. I kept deferring my payments because other things came up. It is best to be consistent, pay off the loans with the least amount first and make sure you do not miss a payment so that it does not reflect on your credit report.

This is a great question!

I am a recent college graduate, and know first-hand how confusing it can be to navigate student loans. The previous comment is great, and really lays out all of the options for you. To avoid being repetitive, I'll offer some advice below in "Suggested Next Steps," based on what has worked well for me.

This is a great question and one that more students should be asking! There are a few different types of loans that, based on your particular circumstances, can be used to fund your education. Here are the the types to consider:

(1) Federal Loans - These loans are offered through The Department of Education based on financial need which is determined via your FAFSA (Free Application for Federal Student Aid) . They tend to have lower interest than private loans, and for some types of Federal loans ("Subsidized"), interest can be deferred until you graduate from school. Here is a brief summary of the different types of Federal aid available:

• Pell Grants - these grants are not loans and as long as they are used for education purposes, such as tuition or school fees, they do not have to be paid back.
• Unsubsidized loans - These loans are provided to students who meet certain income requirements (generally, lower-income, and are need-based). These loans accrue interest from the very beginning and that interest can grow on itself over time. If you take these loans, it's not required - but is often recommended - to try and pay the interest payments each month to minimize the growth of the amount paid back when you graduate.
• Subsidized loans - These are similar to the Unsubsidized but with one caveat - the interest is deferred until you graduate. This is great news as the loan will not start accumulating interest until you've finished school and - hopefully - gotten a job. This prevents the principle of the loan from growing while you're a full time student. Maximize these loans before taking the Unsubsidized version listed above.
• Parent Plus Loans - these loans are actually taken out by your parents/guardians, rather than yourself. If provided this option, be sure to discuss with your parents/guardians first, as they will be financial responsible for the amount of the loan until it is paid off.

(2) Private Loans - These are loans funded by privately owned loan companies like Sallie Mae, Discover Student Loans, etc. These loans can have higher interest rates and generally, are recommended only after you've exhausted all other financial aid options. They accrue interest beginning with the first month, so they tend to grow very quickly over time and in the long run, can be very costly.

(3) Co-Op arrangements - Some schools (Like Northeastern in Boston) offer co-op programs. These programs generally will require you to be in school full time for 6 months and then will deploy you to an intern-esque position to "earn" money for your education fro the remainder of the year. Co-op programs vary by school and availability, but these can help decrease the amount of money you owe once you graduate.

The best advice I can give you is this: When applying to schools (or if you're already in school), be sure to complete you FAFSA as soon as possible. Often times between scholarships and financial aid programs offered by the school (academic scholarships, work-study programs, co-op opportunities, program of study based scholarships, etc) and the financial aid offered by The Dept. of Ed, you may not have to take out other types of loans.

If you do take out private loans, it's important that you pay them back as soon as you are able because, as I mentioned above, they often accrue interest rapidly and at a higher rate than other types of loans. Private loans are inevitable for some students, but they are manageable if taken out responsibly. My general advice here is to maximize the use of all other loan types and scholarship opportunities BEFORE applying for a private loan.

[Also, before you sign up for loans, consider your future. If you're planning to be a Social Worker, understand that the salary of your future profession is often not very high versus that of a doctor or an engineer, where the starting salary is larger. Would it make sense to take out $200K in loans if you're only going to be making $40-$50K a year? Probably not. So when choosing financial options and a college, think about it from the future-you's perspective.]

No matter which loan options you take, it's VERY important that you have a plan in place to pay them back. There are very few forgiveness programs and are typically only available to Teachers (5 years of service in a low-income area) and Public Servants working in government positions for 10 years (during which time regular payments must have been made for 120 cycles without missing any). Failure to pay the loans back can result in default, will affect your credit score and can prevent you from getting other types of loans (think mortgage, car, credit cards, etc), and can even result in wage garnishment (specifically for federal loans - and they won't ask your permission before they start taking the money). I strongly encourage you to meet with your schools financial aid office to discuss your options and to be sure you fully understand them. Ask questions such as the following and make sure you fully comprehend the answers:

• What is the total amount of the loan?
• What is the interest rate?
• When does the loan begin accruing interest?
• What are the terms of the loan and how long do I have to pay it back?
• Are there different repayment options available (standard payments, income based payments, deferrals, hardships, etc.)?
• Can I consolidate my loans? (Some loans can be "consolidated" after you graduate - that is, lumped together into one sum to be repaid at a fixed interest rate. This may or may not make sense depending on the interest rates of various loans, so make sure the financial aid counselor or loan officer explains the terms of the loan in full before you consider consolidation).

Wishing you the best of luck in your educational and financial endeavors.

Hey Michael, great question! I wish I had known the answer to this when I was getting ready for college. For me, I sort of forgot about my loans until they became due because I just wanted to pretend they were not there. My best advice, financially speaking, is to try to pay off your interest as soon as you can. Instead of spending that money you've saved on a new video game, put it towards interest while in school. It goes a long way, and will save you the stress later in life when bills become more apparent.

Once I was able to start my career at PwC, I started paying double the minimum payment in order to eliminate my loans at a quicker rate and eat at the principal balances, not letting the interest build.

Hope that helps!