Why Are Student Loans Considered Unsecured – The Details

Student Loans Considered Unsecured

Loans are classified into two types: secured and unsecured. A student loan is a very common type of loan in the USA. Almost 70% of American college students took student loans to complete their graduation. If you are planning to take a student loan then you should understand the difference between secured and unsecured loans as well as know why student loans are considered as unsecured.

Why Are Student Loans

A loan is considered unsecured when the loan is approved without any collateral. So, student loans are unsecured because these types of loans don’t have a physical asset as security. Therefore, if you default on a student loan you don’t have to lose anything but the lander has the risk to lose the money. So, if you fail to pay the debt then it will result in some type of collection effort by the creditor.

What Is A Student Loan?

What Is A Student Loan

A student loan is a type of loan that is specially designed to help the students continue their study by paying post-secondary education and the associated fees, such as tuition, books, and supplies, etc. If you don’t have money to pursue higher education then you can take a student loan. There are many lenders available that offer student loans. Moreover, the U.S. government offers federal student loans. Usually, the banks, credit unions, state loan agencies, and other financial institutions offer private student loans.

Types Of Student Loans

There are various types of student loans available. They are – 

  • Federal Student Loans
    • Direct Subsidized Loans
    • Direct Unsubsidized Loans
    • Parent PLUS Loans
    • Graduate PLUS Loans
    • Direct Consolidation Loans
  • Private Student loans
  • Private Parent loans
  • Stafford Loans
    • Subsidized Stafford Loans
    • Unsubsidized Stafford Loans
  • Direct Consolidation Loans
  • PLUS Loans
  • Private Education Loans
  • Health Professions Student Loans

What Is A Secured Loan?

A secured loan is a type of loan where the borrower has to submit some assets as collateral for the loan. Usually, the collateral includes physical assets like property, vehicles, etc., or liquid assets like cash. If for any reason the borrower fails to pay the debt in time or becomes defaulted then the creditor will take possession of the asset that was used as collateral. There are two purposes of a secured loan. The first purpose is to secure the debt. For the second purpose, the borrower will receive loans on more favorable terms than that available for unsecured loans. A very common example of a secured loan is a mortgage loan.

Pros Of Secured Loans

1. Higher browsing limits 

2. Lower interest rates

3. Easy to get approved

Cons Of Secured Loans

1. Collateral required

2. Risk of losing assets

3. Fewer options

What Is An Unsecured Loan?

An unsecured loan is a type of loan where the borrower doesn’t have to provide any type of collateral. This type of loan is not protected by a guarantor in the case of a bankruptcy or the borrower fails to meet the terms for repayment. So, if the borrower fails to make the full payment, then the lender won’t have anything to take to recover the outstanding debt.

Pros Of Unsecured Loans

1. No collateral required

2. Fast access to funds

3. No risk of losing assets

4. Fewer borrowing restrictions

5. Competitive rates for those with strong credit

Cons of Unsecured Loans

1. Lower browsing limits

2. Higher interest rates

3. Harder to get approved     

Comparison Of Various Student Loans

CriteriaFederal Direct LoansGrad PLUS LoansPrivate Student Loans
Maximum Amount You Can BorrowAnnual limit: $20,500School’s financial aid office also imposes limits based on the needUp to the cost of attendanceVaries by lender Usually depends on the cost of tuition
Credit RequirementsNo credit check A credit score doesn’t determine eligibilityEligibility will be determined based on your credit If you can’t qualify based on your credit score then you will require an endorserEligibility will be determined based on your credit and income If you can’t qualify based on your credit score then you will require an endorser
Interest RatesFixed-rate of 4.30%Fixed-rate of 5.30%Fixed or variable rates, varies by lender
Origination Fees1.057% for loans disbursed between Oct. 1, 2020, and Oct. 1, 20214.228% for loans between Oct. 1, 2020, and Oct. 1, 2021Varies by lenderMany loans have no origination fees
Repayment termsMultiple repayment options Standard 10-year repayment planGraduated repayment Income-driven repayment plansMultiple repayment options Standard 10-year repayment planGraduated repayment Income-driven repayment plansVaries by lender Terms typically range from five to 20 years
In-School Repayment PlansDon’t have to make payment when in schoolDon’t have to make payment when in schoolN/A

List Of Best Private Student Loans For 2022

College Ave Student Loans

1. Loan types: Undergraduate, Graduate, Parent Loan, Refinance, MBA, Law School, Dental School, Medical School, International Student Loan

2. Minimum FICO credit score: Not disclosed

3. Co-signer required: Yes

4. Better Business Bureau rating: A+

Earnest Student Loan

1. Loan types: Undergraduate, Graduate, Parent Loans, Refinance, MBA, Law School, Medical School

2. Minimum FICO credit score: 650

3. Co-signer required: No

4. Better Business Bureau rating: A

Education Loan Finance Student Loan

1. Loan types: Undergraduate, Graduate, Parent Loan, Refinance, Medical School, Dental School, MBA, Law School

2. Minimum FICO credit score: Not disclosed

3. Co-signer required: No

4. Better Business Bureau rating: A

Sallie Mae Student Loan

1. Loan types: Undergraduate, Graduate, MBA, Medical School, Dental School, Law School

2. Minimum FICO credit score: Mid 600s

3. Co-signer required: No

4. Better Business Bureau rating: A+

Ascent Funding Student Loan

1. Loan types: Undergraduate, Graduate, MBA, Law School, Dental, Medical, International Student Loan

2. Minimum FICO credit score: N/A

3. Co-signer required: No

4. Better Business Bureau rating: A+

SoFi Student Loan

1. Loan types: Undergraduate, Graduate, Parent Loan, MBA, Medical School, Law School, Refinance

2. Minimum FICO credit score: Not disclosed

3. Co-signer required: No

4. Better Business Bureau rating: A+

Citizens Bank Student Loan

1. Loan types: Undergraduate, Graduate, Refinance, Parent Loan, MBA, Medical School, Dental School, Law School, International Student Loan

2. Minimum FICO credit score: Not disclosed

3. Co-signer required: No

4. Better Business Bureau rating: A+

LendKey’s Digital Platform Student Loan

1. Loan types: Undergraduate, Graduate, Refinance

2. Minimum FICO credit score: Not disclosed

3. Co-signer required: No

4. Better Business Bureau rating: A

CommonBond Student Loan

1. Loan types: Undergraduate, Graduate, Refinance, MBA, Dental School, Medical School

2. Minimum FICO credit score: Not disclosed

3. Co-signer required: Yes

4. Better Business Bureau rating: B+

PNC Bank Student Loan

1. Loan types: Undergraduate, Refinance, Medical

2. Minimum FICO credit score: Not disclosed

3. Co-signer required: No

4. Better Business Bureau rating: A+

Information Required For Student Loans

Information Required For Student Loans

You will need to provide quite a little information while applying for student loans. Some common information for student loans is – 

1. Name, address, phone number, and email

2. Date of birth and Social Security number

3. Recent pay stubs or other proof of income

4. Bank account balances

5. Copy of mortgage statement or lease agreement

6. Employer’s name, phone number, and length of employment, if applicable

7. School’s name and the student’s estimated cost of attendance

8. Student’s year in school and semester of enrollment

9. Amount of financial aid received (you can find this on the award letter from the school)

10. Expected graduation date

11. The desired loan amount and the repayment period

12. Reference

13. Co-signer’s name and valid contact information, if applicable

FAQs About Why Are Student Loans Considered Unsecured

1. Are Student Loans Considered Unsecured Debt?

Yes, a student loan is unsecured because this type of loan doesn’t have any collateral. However, there are some student loans available that are backed by the government or an investor so, these student loans are secured loans.

2. Why Are Student Loans Riskier Than Other Loans?

Student loans are riskier for both lenders and borrowers. Usually, student loans have a higher interest rate so you might mind it difficult to get another loan along with the student loan. Student loans increase the debt-to-income ratio. A student loan is also riskier for the lender because this type of loan doesn’t have any collateral so if the borrower becomes defaults, then the lender will lose his money.

3. What Type Of Debt Is A Student Loan?

A student loan is an unsecured installment debt but a student loan usually has more flexible payment terms than other loans.

4. Are Student Loans Financial Assets?

Student loans will consider as an asset if the loan amount remains unspent on the date the FAFSA is filed. On the other hand, a line of credit won’t count as an asset. 

Last Updated on January 12, 2022 by Musa D

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