How Student Loan Debt is Different From Other Types of Debt

Courtney Nagle

Ignoring student loan debt does not make it go away. Student loans, like all consumer debt, are taken out with the expectation that the borrower will pay them back.

All consumer debt can be broken down into two main types, either secured or unsecured. Secured debt is backed or "secured" either by another person liable for the debt or by the item being purchased, like a car or a house. Unsecured debt like credit cards, personal loans and medical debt are not backed by collateral or any other guarantor, just a promise to pay from the consumer.

While student loans fall under the unsecured category, they are not treated the same way when it comes to nonpayment. Failure to pay any debt will result in some type of collection effort by the creditor. The type of debt will determine the type of collection effort.

Because there is usually collateral attached to a secured loan, the remedy for failing to pay is generally repossession or foreclosure. If another guarantor was used for the secured loan, that person will be pursued next for payment.

Since there is no collateral or other guarantor attached to an unsecured student loan, these remedies do not exist. This means failure to pay an unsecured debt, like a student loan, will require legal action that can ultimately result in a lawsuit and the possibility of having a judgment rendered against the consumer, including garnishment of wages.

[Read: Q&A: Understanding Student Loan Discharge Eligibility.]

There are a few key differences between student loans and other consumer debt for borrowers to consider.

Consumers struggling with student loan debt may not find relief through bankruptcy. For consumers struggling with most other types of debt, filing for bankruptcy is an option. In comparison, while not impossible, the requirements for discharging student loan debt through bankruptcy are quite stringent. These include proving undue hardship that is likely to continue and demonstrating that a good faith effort to repay the loan has been made.

This test applies to both federal and private student loans, because both are protected by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Federal student loans are backed by the federal government. It is important to understand how student loans are guaranteed, which is different from other kinds of consumer debt.

Federal student loans are backed by the federal government and processed and disbursed by the U.S. Department of Education. Private student loans are backed by private institutions, but as noted above, are protected by the same bankruptcy act.

Federal student loans do not have a statute of limitations. It also important to know that in the case of federal student loans, there is no statute of limitations to fall back on. Other types of consumer debt, such as credit cards, generally have a three to 10 year range for their statute of limitations, but these vary based on state laws, according to the U.S. Federal Trade Commission.

[Read: Understand the Statute of Limitations on Student Loans.]

While private loans do have a statute of limitation that is set by state governments, running out the clock does not mean that the debt goes away. The statute of limitations is simply the time limit set for when a creditor can sue for failure to pay the debt.

Federal student loans do offer protections. Although student loans do not have the same statute of limitation protections as other consumer debt, the federal government has taken steps to provide other forms of protection from overbearing debt.

Federal loans offer various repayment plans that can be altered as circumstances change. The standard repayment term for a federal student loan is 10 years, but these loans also offer graduated, extended and income-driven repayment terms. Federal loans also offer some forgiveness programs.

[Read: What to Know About Federal Student Loan Repayment Options.]

Private loans are generally for 10 years and, in contrast, income-driven repayment terms and loan forgiveness are generally not available.

Since private loans offer few options for repayment, they are the last avenue that borrowers should pursue when seeking to finance education. Private loans may be necessary in the end, but scholarship and grant opportunities should be explored first, followed by federal student loan options.

The Student Loan Ranger suggests never trying to avoid repayment of student loans. It's important to communicate with loan servicers and keep them informed of your financial situation if you are having trouble paying, because student loans can come back to haunt you even 30 or 40 years down the road if they go unpaid.