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Are Student Loans Secured or Unsecured? All You Need to Know

Are Student Loans Secured or Unsecured? All You Need to Know
Rebecca Safier
Rebecca SafierUpdated June 21, 2024
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Student loans are typically unsecured, meaning you don’t need to guarantee them with collateral. That said, it may be possible to borrow a secured loan in the form of a home equity loan or home equity line of credit (HELOC) to pay for your or your child’s education expenses. While borrowing against the equity of your home might be an affordable option, it also involves some real risk.Let’s take a closer look at the question of whether student loans are secured or unsecured, starting with secured loans to pay for school.

Secured Loans for Education Expenses 

Many students focus on getting a scholarship or grant to fund their schooling to avoid the burden of student loans. But of course that’s not always possible. Need-based financial aid can often bridge the gap between family savings and tuition. Secured loans are guaranteed by collateral, such as your home, car, or another asset. While you probably won’t find a secured student loan, you could consider borrowing against the equity of your home to pay for school. If you qualify, you can usually borrow up to 80% of the value of your home. Home equity loans work like a traditional loan — you get a lump sum amount upfront and pay it back with monthly payments over time. A HELOC, on the other hand, works more like a credit card. You can draw on it as you need and pay it back as you go. For homeowners, tapping into equity can be an affordable way to access funds. If you’re a college student or a parent of one, you could consider leveraging the value of your home to cover costs. However, falling behind on payments means you run the risk of losing your home, a risk that you wouldn’t face with an unsecured loan.

Unsecured Student Loans - Credit Cards, Student Loans, and Personal Loans

Most student loans are unsecured, meaning you don’t need to put up any collateral to borrow one. You have two options for student loans: federal student loans and private ones. 

Federal Student Loans 

Federal student loans are available to any U.S. citizen or eligible noncitizen who is attending a school that participates in the federal financial aid program. To apply for a federal student loan, you simply need to submit the Free Application for Student Aid (FAFSA). Federal subsidized and unsubsidized loans have fairly easy eligibility requirements and low fixed interest rates, but they also come with borrowing limits. If you’ve hit your limit and need additional funding, you could consider a private student loan. 

Private Student Loans 

Since private student loans are unsecured, lenders look at your credit and income before approving you. Most college students don’t have a lengthy credit history, so they must apply with a cosigner, such as a parent or other trusted adult, to qualify. Recommended: Private vs Federal Student Loans: The Complete Guide

Personal Loans 

You might also be able to borrow an unsecured personal loan to pay for your education expenses. As with private student loans, you’ll need to meet a lender’s criteria for credit and income to qualify. You’re also supposed to use the loan for an approved purpose. Some lenders might not allow you to use a personal loan to pay for tuition, for instance, but you might be able to take one out to cover living expenses.

Credit Cards 

Credit cards are another example of unsecured debt (with the exception of secured credit cards that require an upfront deposit of funds). You can charge purchases on an unsecured credit card and pay them off at a future date. Since credit cards come with high APRs, however, beware of charging more than you can afford. If you can pay off your balance in full each month, you’ll avoid these high interest charges. 

Key Differences Between Secured and Unsecured Student Loans

The primary difference between secured and unsecured loans comes down to collateral. Plus, most secured loans are not specifically designed to pay for education, but rather offer general funding that you might choose to allocate for that purpose.

Borrowing Requirements 

When you apply for a secured loan, a lender will require collateral to back it, such as your home or car. Since an unsecured loan doesn’t involve collateral, a lender looks more closely at your credit and income. As a college student, you might need to apply with a cosigner to meet these underwriting requirements. Note that federal student loans are an exception. Most federal student loans don’t involve a credit check, allowing a student to borrow in their own name. The one exception is PLUS loans, which do have a credit component to the application (but it’s more lax than what you’ll see with most private lenders).

Interest Rates

Secured loans, such as home equity loans and HELOCs, tend to come with low interest rates, making them an affordable borrowing option. On unsecured loans, your interest rate generally depends on your credit. Borrowers with excellent credit will get better rates than those with weaker credit. Federal student loans are again an exception, as they offer relatively low, fixed interest rates. For the 2024-25 academic year, for example, the interest rate on Direct subsidized and unsubsidized loans is 6.53% for undergraduates and 8.08% for graduate students (unsubsidized only).Recommended: Student Loan Interest: How Much Interest Should You Expect to Pay on Student Loans?

Repayment Tenure

Whether you opt for a secured or unsecured loan, your repayment tenure will depend on the terms you agree to when you borrow. As mentioned, you typically pay back a home equity loan in fixed monthly installments, whereas you pay back a HELOC similar to how you pay off a credit card. If you borrow federal student loans, you can select from a variety of repayment plans, including the standard 10-year plan or income-driven repayment. Private student loans typically involve fixed monthly payments over 10 to 20 years.

Consequences of Default 

Missing payments on debt often has severe consequences, but the fallout can be even worse with secured debt. Since you back the loan with collateral, you could lose your collateral if you default on the loan. With unsecured debt, a lender can bring you to court, but it can’t seize your assets without a court judgment. Again, federal student loans are somewhat of an exception to the rule, since the government has wide-reaching powers of collection. Federal student loans have no statute of limitations, and the government can garnish your wages, tax refund, or even Social Security benefits in the event you fail to repay. It’s also very difficult, though not impossible, to discharge student loans in bankruptcy. Whether you borrow secured or unsecured loans, one consequence of defaulting is the same — severe damage to your credit for years.

Can You Discharge Student Loan Debt in Bankruptcy?

Discharging student loan debt in bankruptcy is historically not an easy lift. Federal lawmakers have set a higher bar for discharging student loan debt compared with other consumer debt, according to the U.S. Department of Justice.Student loan debts may be discharged in bankruptcy if you file for bankruptcy and can prove that student debt payments would impose an “undue hardship” upon you and your dependents.The Department of Justice in November 2022 announced a new process that can make it easier for debtors to discharge student debt in bankruptcy. The process allows debtors to complete an attestation form to help the Justice Department assess whether the debtor meets the undue hardship standard. Attorneys for the Justice Department would then review multiple factors before recommending whether a debtor should receive a complete or partial discharge of student loan debt.

Secured vs Unsecured Student Loans: Which Is Better?

When it comes to paying for school, unsecured federal student loans are an appealing option for many borrowers. Students can typically qualify on their own, and they’ll reap the benefits of a low, fixed interest rate and flexible repayment options. Federal student loans are also eligible for forgiveness programs. If you need additional funding for school, consider the pros and cons of secured vs. unsecured loans to choose the best loan type for you. If you’re worried about your ability to repay a loan, for instance, it might not make sense to tap into your home’s equity. But if a home equity loan or HELOC would be significantly more affordable than a private student loan or personal loan, one of these financial products could be a viable option. Ultimately, the decision of whether to pursue a secured or unsecured loan comes down to what’s the best fit for your personal situation. Also, make sure you are taking advantage of all the programs that could help you, such as employer student loan repayment.

The Takeaway

The type of loan you borrow, secured or unsecured, can impact your interest rates, repayment terms, borrowing limits, and other factors. If you want to stick with student loans, you’ll likely borrow an unsecured loan. But as discussed above, there may be alternative ways to get funding for school, such as a home equity loan or personal loan. If you borrow student loans to pay for college or graduate school, you might explore refinancing those loans for better rates.Can you refinance federal student loans? Yes, borrowers with good credit may qualify for student loan refinancing. However, you need to be careful about refinancing federal loans with a private lender.One of the disadvantages of refinancing student loans is that you may lose access to federal benefits, such as income-driven repayment available with the SAVE program and Public Service Loan Forgiveness.If you’re interested in restructuring your student debt, Lantern by SoFi can help you find and compare student loan refinancing options.Explore your student loan refinancing options with Lantern.

Frequently Asked Questions

Are federal student loans secured or unsecured debt?
How do I know if my loan is secured or unsecured?
Are credit cards, student loans, and personal loans secured or unsecured loans?
Photo credit: iStock/Moyo Studio
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About the Author

Rebecca Safier

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
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