There are different types of monetary or financial aid that help pay for student expenses. It can be a grant, a scholarship, a federal work-study program, or a student loan.
A student loan is useful when a person’s financial situation does not allow them to make a large contribution to their children’s education. This type of loan is a service that is particularly intended for a person’s college expenses, mainly tuition. Usually, it is the educational institutions that are the intermediaries with the banks that grant the loan.
One of the characteristics of student loans is that the interest rates are significantly lower than a regular loan. Only the interest generated each month is paid instead of paying the tuition as such. This is why student loans are considered unsecured.
The loan repayment is defined by the length of time the student will use the unsecured student loans. For example, if a person’s university studies take five years, they will have the same amount of time to pay off the debt. Today, we will look at why student loans are considered unsecured debts and what that means.
Differences Between a Student Loan and a Grant
A student loan is very different from a student grant. The biggest difference is that a scholarship is granted to the student without the student repaying any amount. According to the type of scholarship, the student may be able to acquire their college education for free in exchange for meeting certain requirements such as maintaining an excellent GPA and participating in school activities.
Some scholarships are partially free. They are known as scholarship-financing. This type of scholarship offers to cover only a certain percentage of the tuition. The remaining percentage must be paid in the normal way. The educational institution defines the percentages according to the student’s academic record and the lender’s payment policies.
On the other hand, a student loan is economic support provided to the student to cover the costs of their studies. It must be repaid throughout their university career or after completing their studies.
What is an Unsecured Debt?
All loans are divided into two main types: secured loans and unsecured loans. While a secured loan is backed by another person responsible for the secured debt or by the property being purchased, such as a house or a car, an unsecured loan is not backed by any responsible party and is simply a promise by the borrower to pay off the unsecured debt they acquired.
In short, unsecured debt is any debt that does not have an adjacent backing. This is because the lender may or may not get back the money he invested, which is riskier for him. To compensate for this risk, loans are often accompanied by a higher interest rate. Therefore, the interest rate charged on unsecured debt is based on the borrower’s creditworthiness.
Some examples of unsecured debt are credit cards, personal loans, and student loans.
Why Are Student Loans Considered Unsecured Debts?
If you default on a student loan, the lender cannot seize any property since nothing is put up as collateral. However, you may face other types of consequences. Although student loans are treated differently than any other loan, they face certain consequences when they are not paid off or you miss your monthly payment.
The borrower can file for bankruptcy to find relief from repaying the acquired debt. When dealing with other types of debt, this may be an option, but it doesn’t mean you can avoid covering a student loan. If a person seeks to discharge student debt through bankruptcy, they need to prove financial hardship and demonstrate that efforts have been made to repay the loan.
Student loans are generally divided into federal and private.
Federal Student Loans
The federal government backs these types of loans. It is also important to know that federal loans do not have a statute of limitations to fall back on. Unlike other types of debt, such as credit card debt, which has a repayment term of 3 to 10 years, federal student loans offer gradual, extended repayment terms based on the borrower’s income. The repayment term of a federal student loan can be modified according to the borrower’s financial circumstances, but the standard term is 10 years.
Private Student Loan
A private student loan is backed by a private financial institution and is protected by bankruptcy law. A private student loan has a term limit set by state governments. The statute of limitations is a time limit that is set for when a lender sues for nonpayment. Running out of time to pay does not mean the debt is discharged.
Privately backed student loans generally have a 10-year repayment term, with the difference being that they do not consider income or loan forgiveness regardless of the borrower’s circumstances.
The reduced repayment options of a private student loan to cover school expenses makes it a viable option. And that’s why other opportunities such as scholarships or student support programs should be considered.
Although student loans have different repayment rules, it is not advisable to ignore the debt. As mentioned above, student loans may not be as difficult to discharge during bankruptcy as any other type of unsecured debt. The only way to discharge such a debt is to repeatedly and credibly prove financial hardship.
Some of the reasons these types of debts become forgivable are because of a serious health situation such as an accident or illness, loss of a job, or a natural disaster that has left you with a significant loss of assets.
Suppose you are having difficulty repaying the student loan you applied for. In that case, it is highly recommended that you significantly reduce your overhead and contribute the money you have saved directly to repay the debt.
To avoid problems with unsecured loan payments like your student loan, it is best to get advice and even credit counseling. You can then create a financial plan with an advisor before you apply. This will help you foresee future problems, and you will learn how to deal with a financial imbalance.