There is a long list of possible reasons an unfamiliar student loan might appear on your credit report.
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.