Sometimes it is a harmless issue, and no action is required. In other cases, it might be evidence of fraud or identity theft and a significant cause for concern.

In my experience, there is usually a simple explanation. However, it is crucial to investigate mysterious student loans on your credit report.

Old Loans Paid In Full

Sometimes borrowers panic because they see a student loan on their credit report that they thought they paid off long ago. In some cases, they have entirely forgotten about the student loan.

It is easy to get to the bottom of an “old” loan on the credit report. These loans will show a $0 balance.

Loans paid in full routinely appear on credit reports. For borrowers, it is a good thing. These old student loans show a positive credit history and can help credit scores.

If your mystery student loan shows a balance other than $0, it probably isn’t an old loan that you have already paid off.

Lender or Servicer Transfer

Another common source of student loan confusion on credit reports is caused by loan transfers.

In some cases, the debt is sold from one private lender to another. With federal loans, it happens when you are assigned a new servicer.

These transfers are especially scary to borrowers because it appears as though the student debt has doubled. In some cases, one loan will essentially appear twice. This happens when the old lender or servicer reports the debt and the new lender or servicer reports the debt.

Fortunately, these issues are usually temporary and often resolve themselves without borrower intervention. However, they can cause a headache if you are trying to qualify for a mortgage, and you have to explain things to your lender.

Consolidation or Refinance

Like a lender or servicer transfer, consolidation and refinancing can cause temporary confusion on credit reports.

For example, when you refinance your student loans, your refinance lender issues you a new loan. The money from that loan is used to pay off some or all of your current student loans. Sometimes, the new loan will show up on a credit report before the old loans show up as paid in full. Fortunately, this issue is usually fixed within a month or two, and borrowers do not have to take any action.

Similarly, when borrowers consolidate their federal student loans, it can result in the debt showing up twice on a credit report. This happened to me when I consolidated, and it has caught many other borrowers by surprise.

Fresh Start Program

As part of the Covid-19 relief, the Department of Education is giving borrowers a “fresh start” if they were delinquent or in default on their federal student loans.

This means that debt that was in default or in collections may now show up as current and in repayment.

If you had previously fallen behind on your federal loans, the “new” loan on your credit report could be a result of the fresh start program. Borrowers do not have to take any action to get a fresh start, so it may happen without any notice or warning.

Sherpa Tip: Did you get a fresh start?

If you suddenly find your loans are current, be sure to check out your options for income-driven repayment. It is designed so that monthly payments are affordable for all borrowers. In many cases, that means paying $0 per month.

Fraud or Identity Theft

Now that we have covered all of the harmless and straightforward explanations, we get to the possibility of fraud or identity theft.

I haven’t seen many fraud or identity theft cases with student loans. I suspect this is because student loans are often issued to the school. This extra step makes it harder for scammers.

That said, it is certainly possible that a student loan shows up on your credit report due to someone else’s actions.

If you suspect that you may be the victim of fraud or identity theft, you should take several steps immediately.

The post Why Do I Have An Unexpected Student Loan On My Credit Report? appeared first on The Student Loan Sherpa.

Refinancing enables borrowers to get lower interest rates and/or lower monthly student loan payments. Federal consolidation can help borrowers qualify for favorable repayment plans and forgiveness programs.

In both a refinance and a consolidation, old loans are eliminated and replaced with new loans.

Unsurprisingly, this debt modification can have an impact on credit scores and credit reports.

A Possible Credit Reporting Timeline Glitch

During the process of a refinance or consolidation, some strange things can happen on the borrower’s credit report.

In some cases, both the old loans and the new loan(s) may appear on the credit report. For a time, it may look as though the borrower has double the debt. This can temporarily tank the borrower’s debt-to-income ratio.

The good news is that this issue is often short-lived. It happens because the lender responsible for the new loans may quickly report the new debt while the old lenders are slow to report that the old loans are paid off.

For this reason, borrowers who are looking to buy a house should plan ahead. Those that want to refinance or consolidate should try to complete the process with several months to spare. This will give the creditors and reporting agencies sufficient time to get things in order.

Credit Score Uncertainty

Projecting credit score changes is an inexact science. The major credit agencies keep the inner workings of their algorithms a secret, and there are many different types of credit scores, so it can be very difficult to compare apples to apples.

What we do know for certain is that eliminating some loans and creating a new loan will have an impact on your credit score. In the short-term, it is possible that the score may drop, but most borrowers should find that their score actually improves in the long run.

There are a couple of reasons that a score might increase as a result of consolidation or refinance:

• Old loans will show up as paid in full.
• Using one loan to pay off several old loans means fewer lines of credit.

Unfortunately, there are also a couple of reasons that a score might drop:

• The oldest line of credit may be closed when the student loan is paid off.
• A hard inquiry (credit pull) can cause a drop in credit score.

Those concerned about how their credit score may be impacted should check out our more detailed analysis of the credit score consequences.

Debt-to-Income Ratio: Potential for a Major Credit Report Change

Many people fixate on the credit score changes, but the Debt-to-Income (DTI) ratio changes are perhaps the most significant.

A common misconception is that DTI refers to a consumer’s total debt compared to their total income. In reality, DTI looks at a consumer’s monthly bills compared to their monthly income.

When student loans are refinanced, the monthly payment usually changes. In some cases, borrowers will opt for a five-year repayment plan in order to secure the lowest possible interest rate. The downside to this option is that their minimum monthly payment will actually go up, which hurts their DTI. Having a higher debt-to-income ratio will make it harder to qualify for credit in the future as it will appear to lenders that you are on a tighter budget.

However, borrowers who opt for a longer repayment term, such as 20 years, may find that their DTI is improved considerably. The downside is that the long loans don’t’ have interest rates as low as the 5-year loans. The benefit is that it can make qualifying for a mortgage or car loan easier.

At present, the five-year loans start at around 2%, while the 20-year loans start at over 4%.

Final Thought: Keep an Eye on the Big Picture

Consolidation and refinancing are excellent tools for helping get student debt under control.

Borrowers are wise to consider how these moves might impact their credit report and credit score. However, it is important to keep priorities in order.

If a borrower concludes that their credit score may drop due to consolidation, it doesn’t mean that the borrower shouldn’t consolidate. A slight reduction in credit score is a small cost compared to the potential savings that can be realized.

On the other side of the equation, some people may need to improve their credit score for employment or purchasing a house. If a small drop in credit score could potentially have devastating consequences, it might be best to temporarily hold off on refinancing or consolidation.

The post The Consequences of Student Loan Refinancing and Consolidation on Credit Reports appeared first on The Student Loan Sherpa.

Seeing double the debt is concerning. However, this issue normally resolves itself fairly quickly.

A Student Loan Sherpa Reader recently faced this issue…

Reader Question: Why am I Seeing Double the Debt my Credit Report?

Reader Nick writes:

What benefit would Mohela/SOFi receive for keeping my formerly refinanced loan active on my credit report? I refinanced from Mohela/Sofi to Earnest six months ago. I randomly checked a credit report that showed both loans as “active” despite the Mohela/Sofi loan being paid in full. A letter to the credit department at Mohela quickly moved the loan to “paid”.

Refinance Procedure

When you refinance your student loans, the new lender, in Nick’s case Earnest, pays off the old loan with the old lender, in this case SoFi. Based on Nick’s email it sounds like both loans appeared on his credit report, essentially showing double the student loan debt.

The Most Logical Explanation for Old and New Loans on a Credit Report

In most cases, the two loans both showing up on the credit report is normal. Lenders do their monthly reporting at different times, so it is perfectly reasonable to see both loans on a credit report done close in time to the refinance.

Additionally, there is also a slight delay that should be expected. The new lender will want the loan to appear on the credit report as soon as the check is issued. The old lender will keep the old loan on the credit report until the check is mailed and processed. This processing time could also explain many occurrences for both loans to appear on the credit report.

The Concern of Longer Delay

What makes Nick’s case very unique is that both loans appeared on his credit report for over 6 months. This should never be a part of the process. Given how quickly the error was resolved, it sounds like Mohela was able to recognize the issue and get it fixed.

As far as finding a motive for Mohela to keep the loan active, I can’t think of one. The debt has clearly been paid in full and it sounds like all parties agree. Mohela has no financial incentive to have a loan appear on the credit report if they know the loan has been paid in full.

Nick’s Smart Moves

Based on Nick’s email, there are a couple of really smart decisions he made.

First, he was savvy enough to refinance a refinanced loan. Unlike refinancing a house, there is no cost to refinancing a student loan. In fact, many student loan lenders offer cash for new customers. Even though he already refinanced his student loans, Nick kept a close eye on his finances and the market, and when the opportunity came to make things even better, he pounced.

Second, Nick was watching his credit report. By identifying the error relatively quickly in time he was able to send one quick letter and get his problem addressed. Had he done so years later, this situation could have been much more difficult. By law, everyone gets to see their credit report once a year, but people can pay for extra reports. We recommend checking your credit report at least once a year. Nick’s situation is a good example of why it is important.

The post Why is my old student loan and my refinanced loan on my credit report? appeared first on The Student Loan Sherpa.