Student loan debt is a topic that can be tricky to navigate. Like any loan, the expectation is that the borrower will regularly make payments on time. But, when you’re fresh out of college and job prospects are slim, this can be easier said than done. It's important that you understand exactly what you're getting into when it comes to your student loans, and in this post we are going to tackle private loans.
Secured vs. Unsecured Loans
There are two types of consumer debt: secured and unsecured.
Secured debt can be backed when a person becomes liable for the debt or by the actual item itself, like a home. Unsecured debt refers to things like credit cards, personal loans, and medical bills. These types of loans are typically not backed by collateral or a guarantor. Lenders are trusting that the consumer will pay.
Even though some types of student loans can fall into the unsecured category, private loans are often require either collateral, or a guarantor, or sometimes both.
Student Loans vs. Other Consumer Debt
Borrowers should consider a few key differences between student loans and other consumer debt.
For example, filing for bankruptcy - if often relieves you from other consumer debts - may not relieve your student loan debt. The requirements for discharging student debt through bankruptcy are quite strict.
Due to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, borrowers are required to prove that undue hardship was likely to continue and demonstrate that every effort to repay the loan had been made.
Federal student loans are guaranteed differently than other types of debt. Since federal student loans are backed by the government they have no statute of limitations, they are processed by the U.S. Department of Education.
Even though private student loans are backed by private institutions, they are still protected by the same bankruptcy act. There is a statute of limitations on private loans - set by the specific State - but trying to outrun the clock does not guarantee that it will disappear. The statute of limitations is just the time limit in which a creditor can sue the consumer for nonpayment. That does not mean the record of debt will vanish.
An advantage to federal loans is that they are able to offer various plans for repayment that can be adapted as circumstances change. The standard term for repayment of a federal government student loan is ten years but there are also graduated, extended, and income-driven options including forgiveness programs.
What Not to Do
Never try to avoid repaying student loans. If you a borrower becomes overwhelmed by their financial obligations they should communicate with loan services to keep them informed of the situation and do their best to make payments because student loan debt can cause problems 30 and 40 years later if it goes unpaid.