Is a student loan secured or unsecured? Here’s what to know.

Please note: Discover® Home Loans offers a home equity and cash out refinance loan product but does not offer HELOCs. 

Millions of Americans undertake higher education every year, and a common way to pay for their educational expenses is by borrowing funds.

In many cases, students pursuing degrees, certification programs, and other eligible programs have the option to choose between federal and private student loans. 

Federal student loans are unsecured loans distributed by the federal government and are available to many students pursuing higher education. Congress sets the interest rates for federal student loans each year, which are generally lower compared to private loans.

Private student loans are secured or unsecured loans offered by banks and other financial institutions. Unlike most federal student loans, they usually require an established credit record or a co-signer.

Let’s explore what it means for a student loan to be secured versus unsecured.

Loans for higher education: Secured vs unsecured loans

Banks and other financial institutions may offer two categories of loans — secured and unsecured.

Secured loans for higher education

Secured loans require collateral, like a property, in exchange for the loan money. If the borrower fails to pay their loan, the financial institution can keep or sell the collateral to satisfy the debt.

Examples of secured loans include cash out mortgage refinancing, home equity loans, and a home equity line of credit (HELOC).

Secured loans may be risky. Failure to pay this type of loan could result in losing the collateral you provided in exchange for the funds.

For example, if you were to obtain a home equity loan to pay for higher education, your home would serve as collateral for the loan. Failure to pay your loan may put your home at risk.  

That said, secured loans may have lower interest rates than unsecured loans. 

If you’re interested in taking out a secured loan for higher education, you may want to plan ahead and start the application process early. Also, it may help to find out whether you can meet your loan obligations before borrowing.

Unsecured loans for higher education

Financial institutions may also offer unsecured loans which don’t require the borrower to provide any collateral in exchange for funds.    

An unsecured loan may be a good option for students who lack the collateral necessary to obtain a secured loan. 

Whether you choose a secured or unsecured loan, you may need a co-signer if you don’t have an established credit record. If this is the case, make sure your co-signer understands what they are signing up for. They will also be responsible for your loan if you fail to make payments.

Which loan is better: Secured vs unsecured?

Secured and unsecured student loans could impact your credit in similar ways. For example, if you make a late payment or default on either a secured or unsecured loan, your lender may report this to credit bureaus.  

Your lender may repossess the collateral you provided if you default on a secured loan. If the collateral doesn't fully cover your debt, your lender might pursue the remaining amount you owe in court. Your lender may also seek repayment through the court if you default on an unsecured loan.

So, which wins: Secured or unsecured loans?

Secured and unsecured loans for higher education both have pros and cons, so consider how each loan type will affect you.

If you have collateral to offer in exchange for funds, the potential benefits of comparably low rates on a secured loan may be a great opportunity.

On the other hand, if you need a loan but don’t have collateral, consider an unsecured loan. 

If you choose either of these loans, be sure to analyze your repayment schedule carefully.