How to Protect Yourself If You Have Risk-Shared Loans

Maybe you aren't sure if you even have this type of (older) student loan. To find out – and see the extra risks involved – see this Debt 101 article: Do You Have a Risk-Shared Loan?

It details why you face extra risk with risk-shared loans for two reasons: 'call-ins' and loan aid mistakes.

Protect yourself from 'call-ins'

If you fall behind on risk-shared student loan payments, even through the fault of your lender, such as poor records or misinformation, your student loan lender bank may also 'call in' every other loan, credit card or line of credit you have with them.

When a debt is 'called in,' you're expected to make full and immediate payment.

Facing problems with other debts on top of your student loans would damage your credit rating and risk a financial crisis.

If you're already in financial trouble, see this Debt 101 article: How to Pay Enough to Stop a Crisis.

If you're not, the advice in this article could protect you from the risk of having other loans 'called in' by your lender should even hit a problem with your risk-shared student loan.

And no, you can't just move your student loan to a lender where you don't have other debts. Unless you pay a student loan with money from elsewhere (which would disqualify you from student loan aid and tax credits) you must keep all student loans with their original lender.

Put your other debts out of reach

Your first act of self-protection is to move all your other debts, so they are safe from your risk-shared lender. Let's call them your extra debts.

That doesn't necessarily mean you must close down credit cards or lines of credit – if you have the discipline to stop using them. In theory, you could just stop using them until your risk-shared loan is paid off, and then you'll have these credit options available for your use if you need them.

But there are lots of variables to consider before you decide whether to keep these credit options for later use or just shut them down now.

For example, if you are paying an annual fee for your credit card, you may see no point in keeping that up once you stop using the card.

Or if you're credit score is marginal, you may want to close down any credit options you're not using so you don't look over-loaded with debt risk if you must apply for new lines of credits, loans or cards so you can shift your debt from the lender holding your risk-shared loans.

Caution: Make sure you keep (or set up) overdraft protection or a small line of credit for your risk-shared student loan account. This keeps you out of trouble if you ever forget to cover a student loan payment. It's not the same as having a debt with your bank. It just gives you temporary protection.

If you have any confusion about these decisions, discuss them with a financial advisor – perhaps a free one at the bank or credit union you want to shift your debts to.

Just don't tell your prospective bank or credit union that you're shifting debts to protect yourself in case of a student loan default! All you need to say is that you'd rather deal with them, instead of your old lender. They should be happy to get your business.

Here's how to shift extra debts from your risk-shared lender:

  1. Do an audit. Ask your lender to tell you exactly what loans, credit cards or lines of credit you have with the bank, aside from your risk-shared student loan(s). You can find this information at your bank branch. List much you owe on each loan, credit line or card. Also, list the interest rates and monthly payments for each of these products.
  2. Next, shop around for the best place to transfer all these other debt obligations. Look for banks or credit unions you'd like to deal with. Explain that you want to transfer over to them all the balances you have with your current lender. See if they can give you the same services (loan, line of credit and/or card) at the same (or lower) interest rates and monthly payments you're paying now.

If you like banking with your risk-shared lender, you can come back later with your other loans, lines of credits or credit cards. Just wait until your risk-shared loans are all paid off!

Cut the odds for student loan mistakes

Your second act of self-protection is to cut your risks of experiencing delays, student loan aid mistakes, or bureaucratic snafus that could trigger an accidental default on your risk-shared loan.

Banks don't normally send information to their risk-shared loan clients to update them on the status of their loan payments. And unlike loan service bureaus for the newer types of student loans, banks don't show you on-line records for the old risk-shared student loans.

Given this lack of information, some people accidentally default on their risk-shared loans when they experience delays, lost aid application forms, misinformation from student loan service clerks or other mishaps.

You may decide to re-prioritize your debts in order to cut these risks by paying off your risk-shared student loan first. The options are discussed in this Debt 101 article: Which Loan to Pay First.