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When it comes to borrowing money for education, understanding the type of loan you are taking out is crucial. One key distinction is whether your loan is secured or unsecured.
In the case of student loans-both federal and private-the answer is almost always the same: they are unsecured debts. This means that when you borrow money for school, you are not required to offer collateral like a home, car, or any other asset.
Because students rarely have significant assets to pledge, lenders instead rely on other methods to manage risk. For federal loans, the government offers unique benefits such as lower fixed interest rates and various loan forgiveness programs.
Private lenders, while often offering higher and variable rates, tend to provide flexible repayment options, including deferments while a student is still enrolled in school.
How unsecured student loans differ from secured loans
Secured loans, like mortgages or car loans, require borrowers to back their promise to repay with valuable property. If the borrower defaults, the lender has the legal right to seize that property.
In contrast, unsecured loans do not have this safety net for lenders, making them riskier. As a result, unsecured loans usually come with stricter qualification requirements and higher interest rates.
In the case of student loans, non-payment brings different consequences compared to defaulting on a secured loan. If a borrower falls behind on a mortgage, the bank can foreclose on the house. With an unsecured student loan, however, lenders must sue for repayment and may seek a judgment to garnish wages or bank s.
Federal student loans also carry specific rules that differ from traditional unsecured debts. Notably, defaulting on a student loan can lead to a legal battle in bankruptcy court, where borrowers must prove "undue hardship" to have the debt discharged.
Moreover, certain federal protections-like deferments, forbearance, and loan forgiveness programs-provide relief options not available with most unsecured debts.
What about private student loans? Private lenders generally offer fewer protections. Interest rates may be higher, and repayment schedules can begin immediately after disbursement, unless you arrange a deferment. Also, unlike federal loans, private student loans usually do not offer any form of forgiveness.
Garnishment and protections for student loan borrowers
When it comes to collecting unpaid student loans, federal agencies have powerful tools. For instance, the IRS can garnish up to 15% of your Social Security Disability Insurance (SSDI) benefits for unpaid federal taxes.
Similarly, overdue federal student loans can also trigger garnishment actions, but Supplemental Security Income (SSI) is generally protected from garnishment even for these debts.
Importantly, federal benefits-like Social Security, VA benefits, and federal student aid-receive automatic protection if they are deposited directly into a bank . Your bank must shield two months' worth of these deposits from garnishment.
For example, if you receive $1,000 per month from Social Security, $2,000 must remain untouched even if a debt collector obtains a court order. However, funds beyond that two-month window could still be at risk.
Should your protected benefits be frozen or garnished incorrectly, you have the right to fight back. Banks are required to notify you if garnishment occurs, and you can present evidence in court showing that your funds come from protected sources.
Legal aid is available for many individuals through local programs or through the Eldercare Locator by calling 1-800-677-1116.