What Happens to Your Private Student Loan if the Lending Bank Fails

 A private student loan is a good way to compensate for the difference in education costs required by the school and the amount of money provided by federally backed student loans. As many college students have at least one private student loan, it is natural to wonder what will happen to the loan if the lending bank fails. Though banks do not fail often, there are banks that will inevitably fail and the FDIC will have to step into provide funds to the account holders. 

What Happens when a Bank Fails

Most of the time when a bank fails, it will close one day as one bank, and reopen the following day as a new branch of another institution. It is very common to see an existing bank take over to expand its business. If this happens, most bank account holders will not even realize their bank failed, because the FDIC will not have to make an announcement.

 If the bank fails and there is no other institution willing to take it over, this is when the FDIC will announce to consumers the bank has failed and begin issuing checks to cover the account balance up to $100,000 for traditional accounts and $250,000 for retirement accounts. Any checks that account holders have written that have not cleared the system at the time of the bank closure will not clear. Any loans the bank has in its possession will be sold to other loan holders. If the bank that takes over for the failing institution does not offer the same loan types, those loans will remain with the FDIC. 

What this means for loan holders

In most cases, consumers and loan holders will not even notice the bank has failed. If you receive notification that your bank has failed, you should continue to make your loan payments as required by the terms of your loan until you are notified otherwise. If payments are not made regularly, your credit rating could be adversely affected. If the loan is sold, you may or may not be notified. If you are notified, it is typically to let you know of a change in the way payments are to be made, such as sending them to a different address.

Even though the lending bank fails, the borrowers will still be required to pay back the loan as required through the original terms of the loan. Since loans can be purchased and sold as any other asset, a simple bank failure is not going to be enough to discharge the debt from the borrower. If you have any questions or concerns regarding a lending bank failure and a private student loan, contact the lender right away. 

You can also look up bank failures online at the FDIC website. There is a list of banks and their status along with a phone number for assistance.


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