Keeping up with your student loans is hard enough but your lender can make things even more difficult if they sell your debt to another servicer. While the transfer of student loans is fairly routine, it has the potential to cause some hiccups for unsuspecting borrowers. If you’re worried about the possibility of your loans being sold, here’s how to handle some of the potential problems that can arise.
Make sure the new lender is receiving your payments
Any time your lender decides to transfer or sell your loan to another servicer, they’re obligated to give you a written notice first. Once the new servicer takes over, they’re also required to send out a letter detailing all the information you’ll need to make your payments going forward.
If you make a payment to your older lender while the transfer is in progress, getting it applied to your account can become a hassle. Your previous lender is responsible for sending it along to your new loan servicer but you can’t always count on that happening in a timely manner. Generally, it can take up to 2 billing cycles for the payment to make it to the right place.
During the first 60 days, your new loan servicer won’t report any late payments to the credit bureaus but you shouldn’t assume that the money you sent will show up on time. If you’ve got a payment stuck in limbo, you need to contact both loan servicers to find out when it will be applied. If it looks like you’re going to be late, making an extra payment to cover the gap ensures that your account remains in good standing.
Keep an eye on your credit
Having your student loans sold can affect your credit negatively in a couple of different ways. As I mentioned earlier, you have a 60-day grace period in which late payments aren’t reflected on your credit history but you shouldn’t rule out the possibility of falling behind as a result of the change.
For example, if you moved and your old lender doesn’t have your new address on file, you may not even know that the loan’s been sold. By the time you realize what’s happened, the grace period has already started and now you’re trying to play catch up with your payments. If you end up paying late after the grace period has expired, your lender can report that information on your credit history, which will, in turn negatively impact your score.
The other issue with your student loans being sold is how it affects the overall age of your credit report. The older your accounts are, the better, but you can run into problems if your student loans are the debt you’ve had the longest. If your loans are sold and the old accounts are listed as closed, it may inadvertently drag your score down.
Tip: Take a look at your credit reports after your student loans are sold to verify that your payments are being reported accurately. If you see an error on one or your loan accounts, be sure to dispute the information with the reporting bureau.
Check to see that payments are being applied correctly
Paying extra towards your student loans each month will get you out of debt faster and reduce the amount you’re throwing away on interest. The trick is to make sure those extra payments are being applied properly. Unless you specifically ask your lender to put the extra money towards the principal, they’ll typically credit it towards your loan balance as a whole, starting with the interest first.
If you’ve been making extra principal payments to your old lender, you’ll need to make sure your new loan servicer is on-board. Otherwise, you could end up on Paid Ahead status, which means the additional money you’re sending in is considered an advance on your monthly payments rather than a prepayment of the principal. While you’d still be paying down your loan sooner you won’t be chipping away at the interest as quickly.
When your first statement from the new servicer shows a $0 balance or lists your next due date as several months in the future, that’s a tip-off that you’ve been placed on Paid Ahead status. You’ll need to call your lender to have Paid Ahead status removed from your account and give specific instructions about how extra funds should be applied.
Tip: Ask your new loan servicer whether there are any restrictions or limitations on how additional principal payments can be made. For instance, some lenders require you to send in a paper check while others will accept electronic payments.
Reinstate your automatic payments
Setting up an automatic draft payment for your student loans ensures that they’re always paid on time. It’s also an easy way to shave a few extra dollars off your balance if your loan servicer offers an interest rate reduction for doing so. Depending on the type of loans you owe, you may qualify for a discount of 0.25 percent or 0.50 percent when you choose the set-it-and-forget-it option.
When your student loans are sold, you need to make sure your automatic draft is reestablished as quickly as possible, especially if you’re still getting an interest rate reduction. Even though it’s a relatively small amount, it can add up to some decent savings in the long run.
For instance, let’s say you owe $30,000 at a rate of 5 percent and you’re on a standard 10-year repayment plan. If your monthly payments are $325, a 0.25 percent rate reduction would save you a little over $500 in interest over the life of the loan. Now imagine how valuable a rate reduction would be if you’re unfortunate enough to be stuck with six-figures in loan debt.
Verify your account status after the transfer
Your new loan servicer is required to honor the existing loan terms spelled out in your promissory note but that doesn’t mean there’s no room for error when your debts are transferred. If you’ve signed up for an income-based repayment plan or you’re currently on forbearance, for example, these types of arrangements should carry over, but it doesn’t always happen that way.
If the new lender is expecting a much bigger payment than what you’re used to, your interest rate has increased or your payments have dropped substantially, don’t put off calling them up to find out what’s going on. This is especially important if your loans are supposed to be in forbearance status and you’re not in a position to make payments. If you do nothing, you run the risk of defaulting on your loans which hurts your credit and puts you at risk for collection actions.
When you run into problems after your student loans are sold to another servicer, you can file a complaint with the Consumer Financial Protection Bureau. If you’ve encountered another issue that we haven’t covered here, we’d love for you to share your experiences in the comments.