What Happens to Your Private Student Loan when the Lender Changes Ownership?

It is common to find a lender changes ownership during the course of an active loan. Ownership changes most commonly occur when two lenders merge. However, lenders may change ownership if the original lender fails, becomes insolvent or declares bankruptcy. Whether a bank fails or a lender merges, the process that occurs with an active student loan is the same.

Loans are Assets Sold at Market Value

It may be difficult to think of a loan as an asset, but every loan in good standing counts as a positive asset on a lender's financial statement. Only when a loan goes into default does it become a negative asset or a loss. Otherwise, the loan is considered an active revenue stream. Since a loan is an asset, it can be sold like any other asset for its market value. Market value of a loan can be challenging to determine, and different lenders may even evaluate a loan differently. For example, some lenders will purchase high risk loans because they feel the potential rewards will pay off. The original lender is willing to sell if that lender thinks the loan will not bring in profit.

Grace Period may Occur

The majority of times an investor or new lender buys your loan, the lender is buying more than one loan from your existing lender. In fact, in the case of a bank failure, a new lender may be purchasing the entirety of the existing bank's asset load. The process of finding a borrower for all of the loans and determining their price can take months. During this time, your student loan may enter a grace period. Debts will still come due, but you will not have to pay them until the new lender is established. If your loans are connected to a credit card, the card may be inactive during this period. 

Notice of New Lender

Once legal ownership of your loan has transferred hands, the new owner of the loan will contact you directly in writing. You will receive a notice telling you when and how to make your new payments. It is important to remember the lender purchased your existing contract. This means the lender cannot simply change the terms of your loan through the transfer. You have no obligation to alter the amount you are paying. Of course, a variable rate loan will not offer such guarantees.

Modification may be Offered

Even though you are not obligated to change the terms of your loan, a modification may be offered to you. Typically, a lender only offers modification if it sees a way of profiting. However, if a lender purchased a bulk of loans, then the lender may hope to modify or close a fraction of those loans for reasons other than profit, such as receiving an immediate influx from prepayment. When a new lender offers you the chance to prepay on your loans or increase your monthly payment to reduce your loan length, make sure you understand all of the terms attached before agreeing to the change.

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