Is a Student Loan Secured or Unsecured? Here’s What to Know

You've probably heard the terms “secured debt” and “unsecured debt.” A secured loan requires borrowers to provide collateral to qualify. Unsecured debt, like federal student loans, doesn’t require collateral.

However, that doesn't mean that there aren't consequences if you don’t pay back the loan. Although there are rare circumstances where you can discharge student loans with bankruptcy, it requires additional action, and you'll need to prove that repaying the loan would cause undue hardship.

Here's a look at the differences between secured and unsecured debt and how federal student loans compare to other types of debt.

The difference between secured and unsecured debt

All debt isn’t created equal, and qualifying for some kinds of debt might require accepting added risk by putting up something of value to secure it. The primary difference between secured and unsecured debt is that secured debt requires providing the lender with collateral.

Examples of secured debt include:

• Auto loans.
• Home equity lines of credit (HELOCs).
• Home equity loans.
• Mortgage loan.

With an auto loan, the vehicle is the collateral. Similarly, your house is the collateral on a mortgage loan. If you fail to make payments, the lender can repossess the car or foreclose on the home to recoup its money.

Unsecured debt

Unsecured lending doesn’t require collateral. Instead, lenders rely on a borrower's positive credit history to determine eligibility and use a hard credit inquiry to do a deep dive into your credit score. It will also account for other financial factors to decide whether or not you're worth the lending risk.

Because there's a greater risk in unsecured loans and credit, lenders often have more strict underwriting borrower requirements for eligibility.

Common types of unsecured debt include:

• Credit cards.
• Medical bills.
• Personal loans.
• Student loans.

If you fail to make payments with unsecured debt, the lender must pursue legal action to get their money back. Although you won't lose a specific asset, you’ll still face negative consequences if you don't pay back unsecured debt.

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The unpaid unsecured debt could get bought by a debt collector who can actively try to collect on the debt. Also, lenders and creditors report missing and late payments to credit bureaus, damaging your credit long-term.

How federal loans differ from other types of debt

Like other types of debt, federal student loans require repayment, typically following a six-month grace period after graduating or leaving school. In other ways, though, federal student loans don't have a lot in common with other private student loans or types of debt.

Federal loans are backed by the government

Instead of a lender funding your loan, the federal government funds and backs federal student loans. The Department of Education partners with loan service providers to manage federal student loans.

Most federal loans don’t require a credit check

Most federal student loans don't require a credit check. The Department of Education relies on the FAFSA to determine a borrower's financial need. Borrowers who accept a federal student loan offer must undergo entrance counseling before student loans are disbursed. It also requires exit counseling upon graduation or leaving school.

One exception to this rule is Direct PLUS Loans. The government performs a credit check for applicants who want this type of loan. PLUS loan borrowers must not have an adverse credit history. Even if you don't meet credit requirements, you might still qualify for PLUS loans by meeting other lending requirements.

Federal loans are very rarely discharged in bankruptcy

When someone files for Chapter 7 bankruptcy, any unsecured debts are typically wiped out. However, that's not necessarily the case with federal student loans. Federal student loan debt isn't automatically discharged because you file for bankruptcy. Instead, it requires additional legal action known as an adversary proceeding.

An adversary proceeding is a separate lawsuit generally filed in conjunction with a bankruptcy case. To have your student loans discharged, you'll need to prove in court that repaying your student loans would cause an undue hardship on you and your dependents.

Undue hardship, by the court’s definition, means that repaying the debt would cause:

• An inability to maintain a minimal standard of living, and
• A hardship that would continue for a significant portion of the loan repayment period.

The court must also agree that you've made good faith efforts to repay your student loan debt before filing for bankruptcy.

Pursuing an adversary proceeding doesn't guarantee loan discharge. It might decide to fully discharge your federal loan, only discharge a portion of it, none at all. It might also choose to offer alternative repayment terms as determined by the court.

Federal loans don’t have a statute of limitations

Unlike many private student loans and other loans, there’s no statute of limitations with federal student loans. The government can collect on federal loans regardless of how much time has passed. Borrowers can't ignore student loan repayment and hope it goes away.

It's best to have a plan to repay your loans, whether switching to a different repayment plan, pursuing loan forgiveness or taking advantage of federal protections.

Federal loans offer many protections for struggling borrowers

The federal government provides several protections for borrowers struggling to repay their loans. Federal student loan protections include:

• Loan deferment.
• Loan forbearance.
• Income-driven repayment plans.
• Student loan forgiveness.

Loan deferment and forbearance temporarily suspend loan payments, although you'll still accrue interest during this time. Borrowers can also get relief by switching to an income-driven repayment (IDR) plan. IDR plans are based on your income and family size and could lead to lower monthly payments.

The federal government also offers several student loan forgiveness programs that take the burden of repayment off borrowers. Federal student loan programs include:

• Public Service Loan Forgiveness (PSLF).
• Teacher loan forgiveness.
• Income-driven repayment forgiveness.

Each program has its own rules, but generally, you'll need to make a specific number of qualifying monthly payments while meeting other career requirements.

You can also refinance your student loans. Depending on your credit, you might qualify for a lower interest rate, saving you money in interest charges over the life of the loan. However, refinancing your federal student loans turns them into private student loans, and you’ll lose access to federal protections.

Managing your unsecured student loans

If you have unsecured federal student loans, consider applying for government protections if you face hardship.

One of the best things to manage overwhelming student debt is to create a plan for your loan repayment. Look at your loan balances, available repayment options, and whether you qualify for any loan forgiveness programs to determine the best way forward.

If you have private loans, talk to your lender to learn about your repayment options. It might also be helpful to secure term life insurance or disability insurance early on, in the event you’re unable to repay your debt. Having insurance coverage will protect you and your family long-term and keep you on track with loan repayment.