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  • Writer's picturePreston Morris

why are student loans considered unsecured?

Updated: Aug 3, 2022

An unsecured loan is the type of loan that doesn't need a collateral. As the name suggests, it's “unsecured,” which means the bank or lender has no property to foreclose if the borrower defaults. Unsecured loans come in handy for people who don't own properties or don't want to pledge their assets. Follow Us!

Are student loans considered federal debt?

Generally, there are two types of student loans—federal and private. Federal student loans and federal parent loans: These loans are funded by the federal government. Private student loans: These loans are nonfederal loans, made by a lender such as a bank, credit union, state agency, or a school.

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Why are student loans considered unsecured?

The government doesn't provide insurance for student loans. Students can't be required to make interest payments until they graduate. Lenders don't have any collateral to seize if the loan doesn't get paid back.

Do student loans have collateral?

However, unlike mortgages, student loans are not collateralized, meaning investors get nothing in the case of default. So in the case of a student defaulting, lenders are out even more than they would be in the mortgage-backed securities market.

Can they take your home for student loans?

The federal government won't take your home because you owe student loan debt. However, if you default and the U.S. Department of Education cannot garnish your wages, offset your tax refund, or take your Social Security Benefits, it may sue you.

What are the differences between federal and private student loans?

Federal student loans are made by the government, with terms and conditions that are set by law, and include many benefits (such as fixed interest rates and income-driven repayment plans) not typically offered with private loans.

In contrast, private loans are made by private organizations such banks, credit unions, and state-based or state-affiliated organizations, and have terms and conditions that are set by the lender. Private student loans are generally more expensive than federal student loans.

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