You may have noticed that student loans are a hot topic right now. Critics of blanket student loan forgiveness measures say it’s unfair that borrowers qualify for special benefits, while supporters say forgiveness is warranted because of the unique nature of education debt.
What makes student loans so different from other loans and types of debt? There are six major differentiators we should note.
1. Student Loans Have Different Credit Requirements
With most forms of debt, such as mortgages, auto loans, personal loans or credit cards, borrowers have to meet certain credit requirements. Eligibility requirements vary by creditor, but lenders usually require borrowers to have established credit histories, and they may require good to excellent credit, meaning a score of 670 or better.
Teens and young adults rarely have credit histories or good credit, so qualifying for most forms of credit is difficult on their own. However, student loans work quite differently.
Federal student loans for undergraduate students have no credit requirement; students can qualify for loans even if they have poor credit or no credit at all.
Graduate students and parent borrowers taking out federal PLUS Loans do have to undergo a credit check, but they’re only denied if they have an “adverse credit history,” meaning a credit history with significant issues like a recent bankruptcy or repossession. Poor credit alone is not enough to disqualify a borrower.
Private student loans have more traditional eligibility requirements. Borrowers usually need good to excellent credit. Students with insufficient credit will likely need a co-signer to qualify for a loan.
2. They Rarely Have Income Minimums
When you apply for a loan or line of credit, lenders want to make sure you can afford the payments, so they usually have certain income minimums.
Because students usually aren’t working — or may only work on a part-time basis — they have different criteria. Federal student loans don’t have an income requirement.
Private lenders usually do have a minimum income they require, but you can qualify for a loan by adding a co-signer to your application who has a stable source of income.
3. Student Loans Are Difficult to Discharge In Bankruptcy
In the U.S., borrowers who are financially unable to repay their debt are sometimes able to declare bankruptcy. By declaring bankruptcy, their obligation to repay the debt is eliminated. Bankruptcy has long-lasting consequences and can wreck your credit, but for those who are financially unable to repay their debt, it can be a good solution.
While medical bills, credit cards and personal loans can be discharged in bankruptcy, student loans rarely are eligible for discharge. While it’s possible to qualify for discharge through bankruptcy, student loans are much harder to eliminate than other kinds of debt.
4. Defaulting Has Steeper Consequences
With unsecured debt, meaning debt that isn’t backed or secured by collateral, lenders have limited methods to recoup their money if you default on your payments. Beyond sending you to collections and reporting your late payments to the credit bureaus, creditors would have to sue you and get a court order to take further measures, such as wage garnishment.
However, that’s not the case with federal student loans. With federal loans, your loan servicer can garnish your wages and seize your tax refund without a court order.
5. There’s No Statute of Limitations
Some forms of debt, such as personal loans, are subject to statute of limitations. These statutes prevent creditors from collecting on old debt; depending on the type of debt and state, the statute of limitations typically ranges from three to 10 years.
Statutes of limitation do apply to private student loans, but not to federal student loans. Federal There’s no limit on how long a creditor can collect on these loans.
6. There Are Some Extra Borrower Protections
Unlike other types of loans, which have few repayment options, student loans have more borrower protections and benefits.
Federal student loan borrowers may be eligible for the following:
- Income-driven repayment (IDR) plans: IDR plans base your monthly payment amount on a percentage of your discretionary income, so some borrowers can slash their payments by enrolling in an IDR plan.
- Forbearance or deferment: If you become ill or lose your job, you could pause your payments for months at a time.
- Loan forgiveness: Federal loan borrowers who work as teachers or who work for non-profit organizations can qualify for partial or full loan forgiveness after working for a certain period for an eligible employer.
Private student loans aren’t eligible for federal programs, but some private lenders offer forbearance or financial hardship programs for borrowers who are unable to afford their payments.
Repaying Student Loans
Compared to other forms of debt, student loans are easier to get — and often harder to eliminate. When shopping for a loan, take into consideration what kinds of financial hardship programs a lender offers, and only borrow what you need to cover your expenses; every additional dollar makes it harder to get out of debt.
