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Investment in education is an investment in the future. Considering this fact, in addition to banks and private financial institutions, the federal government provides student loans. As a result, student loans acquire unique features differing from the other loan types. Moreover, many people don’t understand if they should consider student loans unsecured or not.
Categorizing student loans as secured or unsecured might be challenging. In all cases, there will be unavoidable methods of repayment and interest rates. Knowing about student loan types, conditions, and methods of securing the loan help students and parents treat student loans efficiently.
Student Loan Types
Based on the source of the loan, there are two main categories for student loans: federal student loans and non-federal or private student loans.
Federal Student Loans
The federal government provides these loans. In some cases, there is no need for students to have proof of income or credit history to apply. The Federal Student Aid announces the rate on annual basis. This rate is kept to minimal and fixed for the life of the loan. For most federal student loans, students are allowed a period of six months after graduation to start their repayments. Therefore, they are the most preferred options that cover education attainment.
Direct Subsidized Loans or Stafford Loans
The federal government provides this loan type to undergraduate students who qualify for financial needs. The loan covers the learning expenses at a four-year education program. The education attainment can be at a university, college, career, or technical school. The college or the university defines the amount that the student can borrow. The amount should not recede nor exceed the student’s financial need while varying between $5,500 to $12,500 per year. However, defining and approving the amount is conditioned on the school’s participation in the federal loan program.
The advantage of this loan is that the US Department of Education aids students by paying the interest in the following conditions:
A. the student is enrolled at least half time at the program participating school
B. the student is at the grace period of the first six months of leaving the school
C. the student is in the deferment period and stops repaying the loan for up to three years
Such facilitation keeps the debt minimum, an option that is not available with other federal student loans nor with other lenders. It makes us sense the governmental support in securing the loan.
Direct Unsubsidized Loans
The direct unsubsidized loan is very similar to the direct subsidized loan but does not require proof of financial need. It is not only restricted to undergraduate students. Instead, it extends to graduate and professional degree students providing further educational support. However, unlike the direct subsidized loan, as soon as the loan is disbursed, and while the student is enrolled in school, the interest begins accruing. The federal government does not pay the interest for the six-month grace period after leaving school or during deferment times. Therefore, it is more beneficial to apply for direct subsidized loans than direct unsubsidized loans, though the approved amount could be less.
Direct PLUS Loans
The federal government offers this loan type allowing graduate/professional students to cover the educational expenses that the first two loan options are insufficient to cover. Direct Plus loans are also offered to parents of dependent students. They can be up to the full education costs. However, conditions differ. For instance, the loan application requires paying the origination fee, which is not the case of the previous two loans. A credit check or an endorser that guarantees the repayment is also required. Again, the interest begins accruing while the student is still in college or university. On the other hand, if parents receive the loan, students will not take responsibility. Direct plus loans to parents are very hard to delay or defer.
Direct Consolidation Loans
At no additional cost, the federal student loans mentioned earlier can be combined into one single loan. This looks useful for students who have multiple loans. The consolidated loan will have a fixed interest rate based on the average interest rate paid for all federal student loans. The new consolidated loan will have a longer repayment period (up to 30 years) with fixed monthly installments. It may allow an opportunity for a new payment plan and compassion.
However, since the repayment is extended over a longer time frame, students will have to pay more interest. The interest accumulates over the principal amount. Borrowers of consolidated loans lose some benefits. For example, they cannot get an advantage from income-driven repayment plan forgiveness. The consolidated loan also affects Perkins Loan cancellation negatively.
Private or Non-Federal Student Loan
Banks, credit unions, private financial institutions, online loaning companies offer non-federal or private student loans. However, the conditions and terms of these private loans are less beneficial than federal student loans. For instance, most private lenders will demand repayment during study years. There is no grace period for the private student loan. The interest rate depends on the credit history of the borrowing student. Lenders do not consider the student’s financial situation. There could be prepayment penalties and more strict repayment conditions.
Private student loans, on the other hand, provide many advantages. Like 3-month payday loans, lenders offer these loans for a short period. In this way, students can address their immediate financial needs. Like personal loans, private student loans are also available online. This helps students save time and avoid the procedures of federal loans. The latter requires meeting more detailed criteria and conditions. Apart from that, private student loans can fill any financial gap that the federal loan does not help to cover. Applying for a private student loan does not require proof of financial need.
After learning about different student loan types, questions pop up in our minds about the student loan collateral.
Which Option to Choose?
You must refer to private student loans when federal loaning options are exhausted.
Are Student Loans Unsecured Debt?
Yes, at first glance. Student loans do not require physical collateral like home equity loans and auto loans. No one takes the attained education back because it is intangible intellectual property.
Why Are Student Loans Considered Unsecured?
Just like judging a book from its cover, many people assume that the student loan is unsecured. That is because it does not necessitate a guarantee in the form of real estate or a vehicle. They overlook the terms and conditions that lenders, including the federal government, impose when offering loans. True that a student loan does not cost you a house or a vehicle, but it does cost you your own future.
Finally, Are Student Loans Secured or Unsecured?
Categorizing the student loan as secured or unsecured is challenging. It depends on the source of the loan and the student perception of the loan itself.
In the case of federal student loans, the government secures student payments. Therefore, it is more of a secured loan but not with the borrower’s own property. However, there are many troubles that students fall into if they fail to pay the debt. After 90 days of delay, the debt can be classified as delinquent. This influences the student’s credit records negatively. After 270 days, the debt case is transferred to a collection agency. This can affect your tax refund and garnish your paychecks. Employers can also be contacted to have portions of your salary transferred directly to the government.
In the case of private student loans, they are unsecured. Nobody can take the student’s intellectual property. However, any delay in payments causes an increase in the debts even before the student graduates. This results in creating a bad credit history. It limits students’ ability to apply for new loans such as business loans, instant online loans.
Students who start their practical life with huge debts hardly succeed in their future building. Therefore, whether your student loan is secured or unsecured, consider taking it seriously.