Almost 70% of American college students graduate with some sort of debt, with some accruing small amounts of subsidized or unsubsidized loans and others taking out larger private loans to fund their education. Regardless of how you plan to fund your education, it’s important to know as much about loans as possible, including what it means for them to be unsecured.
The Types of Loans Available to Students and Their Unique Attributes
A breakdown of what each type of loan requires of its recipients and the possible interest accrued
At its most basic level, a loan is money or property borrowed with the expectation that it will be paid back in full, plus any interest accrued. Student loans are sums of money given to students with the purpose of paying for educational expenses. The types of loans offered to students include Stafford loans, which are either subsidized or unsubsidized, Parent Loan for Undergraduate Students, or PLUS for short, private loans, and consolidation loans.
The most common types of loans offered to and used by students are Stafford loans, which are partially need-based, and private loans.
Stafford loans are awarded to each student through their financial aid package, which is created after each student completes their FAFSA to report their household income. These loans are awarded in a fixed amount, and the student is given the choice of accepting or declining the offer. Subsidized Stafford loans differ from their counterpart because they do not accrue interest while the student is enrolled in school, while unsubsidized loans do accrue interest during the student's time in school and during deferment periods.
Subsidized Stafford loans are only offered to students who present financial need, while unsubsidized Stafford loans are open for all students to take advantage of. Despite their widespread availability, these unsubsidized loans typically only come in amounts of a couple thousand dollars, of which students can choose to accept part or all of.
Students who have taken out these Stafford loans and are still unable to pay for the rest of their educational costs often turn to private loans, which vary heavily from the federal loans mentioned above. Private loans are taken out from “private organizations such banks, credit unions, and state-based or state-affiliated organizations” and tend to be more expensive than federal loans due to the lenders creating their own terms and interest rates.
Aside from these two types of loans, many students choose to take out Parent PLUS loans, which are federal loans that accrue interest but place full responsibility on the parent of the student to pay back. If these loans are defaulted, or not paid back over an extended period of time, the consequences fall on the parent rather than the student to whom the loans were provided for.
With a better idea of what these types of student loans entail, you’ll be prepared for the next section detailing what it means for loans to be unsecured. For a more in-depth look at student loans, check out our guide to education loans.
What it Means for Loans to be Unsecured
Unsecured versus secured loans, and the advantages of each
Unsecured loans are loans that do not require any collateral in return for taking out the loan. Collateral refers to an asset that is used as security for the loan, and can be taken if the loan is not repaid properly. An example of collateral are cars -- when a car loan is taken out and not repaid, the car can be confiscated. This also applies to other major purchases like mortgages with their collateral being the house the mortgage was taken out for.
Using this same logic, student loans cannot be considered unsecured because what the loan is being used for cannot necessarily be taken away from the student. Nearly all student loan types are paid off after the student has already graduated and received their degree, therefore their education cannot be used as collateral to the loans.
Student loans are, however, taken out with the expectation by the lender that the loans will be paid back in a timely fashion. If student loans of any type have not begun to be paid back 90 days after they are due, they will be considered delinquent. This will cause the student or the parent’s credit score to be significantly impacted, possibly making it harder to take out other kinds of loans, including credit cards, in the future.
If student loans are unpaid (or no attempt has been made to pay them) after 270 days, they will be considered in default. Loans being in default means that the federal government can eventually take back the money you owe in undesirable ways, including taking money from tax refunds and paychecks until that loan and its interest are fully repaid.
While student loans are unsecured, which can help to relieve some stress involved with taking out the loan, it does not mean that the repayment of the loan should be taken any less seriously. Student loans, regardless of whether they accrue interest or not, are still large sums of money that need to be repaid in a certain amount of time and should not be taken out without serious consideration by both the student and the student’s parents.
Tips for Managing Student Loans
Making paying for college and repaying loans just a little bit more manageable
Before even applying to any sort of higher education program, you should make a plan about how you expect to fund your education. For almost all programs, the FAFSA should be filled out by students for every year that the student is enrolled to make sure that they receive the most federal aid possible.
If your plan for paying for college involves taking out any sort of student loans, you should do your research about the different kinds of loans offered (by reading this article, perhaps) and finding the right type of loan for your financial situation. When you get to the point of actually taking out these loans to finance your education, you and your parents should read the terms of the loans carefully in order to find out the expected interest rate and the grace period given, which is the amount of time after graduating that you will have to pay the loan back.
After reviewing the terms of the loans you plan to take out, you can consider implementing some strategies to more effectively pay off those loans after graduating.
One way to pay off student loans efficiently is by allocating the most funds towards your highest interest loan first, if you have multiple loans being paid off at the same time. Doing so helps to eliminate accumulating more interest than necessary, possibly lowering the amount of time it takes to pay back all of those loans.
Federal student loan consolidation is another method to consider in order to reduce monthly payments and be afforded a longer term for the loan. While consolidation has these advantages, it can also create some restrictions that should definitely be considered before choosing to utilize this tip.
While these are only a couple ideas of how to ease the stress of paying back student loans, there are a variety of other unique ways to do the same in a way that might fit your specific financial situation a little bit better.
Unsecured student loans can be a misleading descriptor for the very thing that helps millions of students get closer to obtaining higher education, but students should still always be cautious about taking out any sort of loan, secured or not. While unsecured loans prohibit a degree from being taken away from you, failing to pay back these loans can cause some trouble down the road, making it a difficult road towards reaching your academic and career goals.