Published October 10, 2012
For graduates in the student loan repayment period, it’s important they know exactly where their payments are going each month.
Both federal and private student loans can be sold to other lenders and organizations in a secondary market made up of state and private education organizations that specialize in buying and servicing student loans, according to the College Board.
“The financial industry is undergoing a number of changes,” says Pace Bradshaw, vice president of the Consumer Bankers Association and Education Funding Committee Liaison. “As a result, some lenders may need to re-align their business models [and] borrowers need to be aware that there sometimes can be a change in the servicer of their federal or private student loan.”
Federal student loans were previously made through the Federal Family Education Loan Program (FFELP) or the federally-guaranteed student loan program, which was eliminated in 2010.
Under FFELP, lenders often sold loans to a secondary market or combined them into larger securities and sold them as securitized assets in order to raise capital to make new loans, according to Haley Chitty, spokesperson for the National Association of Student Financial Aid Administrators.
“This was generally how things worked for federal student loans before the credit markets froze and lenders were unable to sell their loans to raise new capital,” he says. “Fearing that lenders wouldn’t be able to raise the capital needed to meet the demand for federal student loans, the U.S. Department of Education began buying loans as a temporary, stop-gap measure.”
Now all federal loans are available through the Direct Loan Program under the Department of Education, contracting additional servicers to handle increased loan volume, says Chitty.
Although all new federal loan borrowers should only have one servicer in the future, here’s what students and grads with existing loans need to know when their loan is sold.
Why Lenders Sell Loans
Chitty explains that lenders may sell loans for a variety of reasons, including raising capital to make future loans.
“Other times, lenders sell their portfolios because they are exiting the loan business, or because they're specifically set up to make loans, but not service them throughout their entire life, which requires a different infrastructure,” he says.
While the life of a typical student loan in the past was around 15 years, borrowers can now extend their loan terms to 25 to 30 years due to the income-based repayment plan and loan consolidation, says Shelly Repp, president of the National Council of Higher Education Resources.
“We’re talking about a pretty long-term asset and a number of smaller banks in particular didn’t want to tie up their money for that full length of the time,” he says.
Repp explains that while students are in school, it’s relatively easy to process or service a loan, but keeping track of a student’s status post-graduation can be a lot of work for lenders. “There’s monthly payments, there are delinquencies, there are required phone calls you have to make, there’s required letters you have to send out, there’s a variety of repayment plans out there that some of the smaller lenders might not want to have to deal with.”
How Borrowers Can Stay Up to Date
Lenders are required to inform borrowers when their loans have been sold and the new holder of the loan (or servicer) is required to inform the borrower that the loan has been purchased, explains Chitty.
Borrowers can expect to receive a letter from their former lender and/or new loan package from their new lender or servicer, but Repp says it’s best to contact the lender directly should any questions arise.
“If you were a borrower and the first contact you had from lender X was a notice saying, ‘we now own your loan and you should be making payments of $100 a month and send it to this address,’ you might say, ‘what is this?’ You’d wonder if it’s legit, frankly.”
Repp points out that neither the loan rates or terms on both federal and private student loans should change at all during a sale.
“The rate is in the promissory note and that covers the note for its entire life, so the new lender/servicer should be servicing the loan in accordance with the original terms.”
How to Avoid Possible Issues
The experts warn that borrowers need to open all incoming mail from their lenders and stay on top of their payment status, especially since many borrowers automatically pay through a direct debit process.
“The borrower has to re-authorize the direct debit but he or she might not know that and may assume that the old instructions are still working when as a matter of fact, they’re not,” says Repp. “There might be a missed payment because the borrower assumed the payment would have been made when it wasn’t made--they need to re-authorize the direct debit instruction.”
Especially during and after the transition period between lenders/servicers, Bradshaw explains grads need to check to make sure their payment is reflected on the account.
If a borrower’s address or any other personal information has changed, the experts recommend notifying the new lender or servicer immediately.
Students can track the status of their federal loans through the National Student Loan Data System (NSLDS), access the Department of Education’s website, and contact their university’s financial aid office for more information.