Student Loans: How to Avoid Debt Traps

Student loans help students to get a college degree that will make it possible for them to get ahead in their careers. However, many of them don't take time to research their options and end up in a debt trap.

If you are looking for a student loan, it makes sense to raise as much money as you can through grants and scholarships, which don't have to be paid back. Grants are provided primarily on the basis of need, while scholarships are usually given on the basis of merit.

After that, you can try to maximize your eligibility for a federal student loan, which carries low, fixed interest rates. Finally, if there is still an unmet need, you can opt for a private loan, with a high, variable interest rate.

Students need to fill out the Free Application for Federal Student Aid (FAFSA), and find out if any aid is provided by their employers, state, county or city.

Different types of Federal student loans

A federal loan is meant to help students enrolled in a two-year or four-year public or private college, university or trade school that participates in federal aid programs.

Federal Stafford Loans are provided directly to college and university students and they may be subsidized, or unsubsidized, depending on the need of the student.

Federal Parent PLUS Loans are meant for parents of students, who are enrolled at least part-time in a program in a participating post-secondary institution.

Federal Graduate PLUS Loans are unsubsidized loans that can be taken by graduate students, on the basis of their credit rating.

Federal Perkins loans are meant for exceptionally needy graduate and undergraduate students. They are provided by the college, which uses a limited pool of funds, provided by the federal government.

Students, who have taken out a number of federal loans, can opt to consolidate them into a single loan, at a lower, fixed interest rate.

Private Student loans

Private loans should only be taken after you have exhausted all other sources of finance. They can be obtained much more quickly than federal loans, but they carry high, variable interest rates.

Different lenders have their own sets of criteria for approving loans. The criteria vary depending on the type of loan, the credit rating of the borrower and whether there will be a co-signer or co-borrower.

If there is a co-signer with a good credit rating, private lenders usually offer a lower interest rate and better terms. Any increase in the interest rate can make a big difference in your debt burden, and help you to save thousands of dollars.

Shop around and read the terms and conditions of loans carefully, before you take on debt. Borrow only what is absolutely essential and you can afford to repay, to avoid getting caught in a debt trap.

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