Why Do Lenders Buy and Sell Student Loan Debts?
Student loans generally fall into two categories: private student loans and federal student loans. With a federal student loan, your lender is the U.S. Government while with a private student loan, your lender is most likely a bank or another financial institution. Your lender is the institution you borrow the money from initially.
Your loan servicer is the institution that handles repayment and all the details of your loan. Your lender may outsource loan servicing to another company. There is an entire secondary market made up of private education and state organizations that specialize in buying, selling, and servicing student loans.
Buying and Selling Student Loans
Financial institutions sell student loans for a number of reasons. Sometimes, they use these sales to free up money to purchase new loans. Other times, lenders sell loans when they decide to exit the loan business altogether. Lenders also may not be loan servicers; while they can hold your loan while you are still in school, once graduation and repayment start, they need to sell your loan to a company that has the infrastructure in place to service loans. In the past, student loans typically lasted around 15 years while today they are often extended to 25 or 30 years, and many financial institutions are not equipped to handle these long-term loans.
In 2010, the student loan market changed with the elimination of the Federal Family Education Loan Program (FFELP). The U.S. Department of Education feared a loss of capital in the private loan industry and began buying private loans to protect it. Currently, 85 percent of outstanding loans are federal student loans, according to the Consumer Finance Protection Bureau (CFPB). These loans are usually serviced by private organizations.
Loan terms are set in your original promissory note issued when you first obtained your student loan. These terms are set through the life of your loan, no matter how many times it changes hands. The CFPB also works with the U.S. Department of Education to help supervise the student loan market and to make sure borrowers are protected. Federal student loans that are serviced by private financial organizations must comply with federal consumer financial laws as well.
What You Need to Know if Your Loan Is Bought or Sold
Loans transfer ownership all the time, and it is nothing to worry about. Your loan terms and rates will stay the same as listed in your original promissory note; you will just make your payments to a different organization. To make the transition smoother, you should:
- Be sure to read all mail from lenders or servicers carefully.
- Make sure your address on file is correct and current.
- Contact your lender directly if you have any questions.
- Make sure your direct payment information is still valid and doesn’t need to be reauthorized.
- Be sure to include a return address on your checks.
Lenders are required to send you a letter when they sell your loan, and new lenders are also required to notify you when they buy your loan. The new lender should send you a packet of information, including details on why your loan was sold, where to send your new payments, and whom to contact with questions.
If any of your information has changed, you need to make sure you contact your lender directly as soon as possible. Sometimes, it can take up to 60 days for loans to transfer, and you need to make sure your payments are going where they are supposed to go. Direct debits may need to be reauthorized to the new organization. The most important thing is to stay informed and read all communications you receive from lenders and loan servicers.