20
Jun

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It’s common in the loan industry for loans to be resold; this practice is best known in the mortgage industry with the sale of loans to the secondary markets Fannie Mae and Freddie Mac. It’s one of the ways lenders make money on a loan. Student loans are no different; many are resold during their life cycle. What happens to your credit when this happens?

Student Loan Secondary Markets

Yes, there is a student loan secondary market. The main lending pool used for originating student loans was the Federal Family Education Loan Program (FFELP), but this was eliminated in 2010. Now all federal loans are available through the Direct Loan Program under the Department of Education. No matter under which program you got your loan, you are likely to have your loan sold. One of the best-known secondary markets is Sallie Mae.

Why Are Loans Sold

Other than making some money from the secondary market by selling a loan, the biggest reasons loans are sold is to regain liquidity (have more cash on hand to make loans), find a servicer that will handle the loan for the remaining term or the lender is exiting the loan business.

 

FFELP loans typically had a life of 15 years, whereas Direct Loans can extend their loan terms to 25 to 30 years due to the income-based repayment plans. For smaller lenders, handling a Direct Loan with a term of 25 or 30 years is a long time to tie up funds and keeping track of students for that long can prove to be challenge for lenders, so these lenders are more likely to sell the loan to other servicers.

How the Resale of a Student Loan Can Affect Your Credit

If you missed payments on your loan before it was transferred, this negative history will remain on your credit report even if the status of the loan is now “Transferred or Sold” on your credit report. If you were eligible for forbearance or deferral at the time of your delinquency in your student loan (you were not responsible for making a payment for that month), you will have to work with the previous lender to make sure your status shows correctly.

 

Your mix of credit on your credit report is 10% of your credit score; having a student loan is good for your mix of credit as it is considered an installment loan. If you’ve never had anything other than credit cards (considered revolving credit), having an installment loan is good for your credit score. If your loans are transferred to another lender, you will have a new installment loan appearing on your credit report, which is good for you.

 

While having too much debt can affect your credit score, having big balances on your student loans will not affect your credit score the way big balances on credit cards can drag down your score.  Revolving loans balances are graded on the percentage of balance to available credit, with lower balances (especially under 25%) being the most beneficial to your credit score. Balances on installment loans do not affect credit.

 

According to FICO, a student loan is not treated as a special type of loan and is treated as any other installment loan. Your loan can be sold while you’re in deferment; deferred loans are considered by the score algorithm, but are not treated any differently than a loan not in deferment. The effect on your credit score depends on other credit factors and can be neutral, negative or positive.

How will I know if my Loan has been sold?

When your old loan is sold, the lender will contact you via the mail. The new owner will tell you where to send payments, their name, phone number and customer service information. You may receive a new coupon book, along with a past history of your payments on the loan, the current terms of the loan, and when the loans originated, along with the total amount you still owe.

 

It’s important to open all of your mail and stay on top of your payment status to make sure you don’t miss any payments. If any of your contact information changes while you have a student loan, especially your mailing address, you need to notify your lender immediately so they can notify you of any changes in who is servicing your loan.

What You Need to Do if Your Loan Has Been Sold

First of all, the new lender cannot change the terms of your loan when they purchase a loan. When you take out a new student loan, you sign a promissory note that covers the life of the loan, and this note is sold along with the loan. Your payments will remain the same.

 

If you auto pay your loan, make sure you switch the recipient of your payments to the new lender. If you accidently pay the old lender, they will not forward your payment to the new lender; it’s your responsibility to straighten things out. Missing a payment can definitely hurt your credit.

 


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