What Happens When A Student Defaults On a Federal Student Loan?

Right now we are seeing the highest rate of defaults on federal student loans in the history of this country. This situation is unsustainable on many levels.

What happens when a student defaults on a federal student loan?

First, take a look at what the term “federal student loan” means. The term refers to a student loan which is backed by a guarantee by the federal government. In other words, the US federal government promises the bank that they will be reimbursed for the loan, even if the student defaults on the loan.

If you have ever been at risk of defaulting on a student loan or entered an agreed upon period of nonpayment due to some form of hardship, you know the steps that occurred. First, your loan is sent to a federal office. What you may not know is that the federal office at that point pays the bank for the balance of the loan and they assume the balance for a period of time. This is generally considered a “rehabilitation period”, during which no additional interest accrues on the loan.

At the end of that period, the loan is farmed back out to lenders. You have no control over what lender picks up the loan, so you may get the same lender back or a different lender.

If you are then unable to maintain the payments on the loan after all deferments have been used up, the loan is considered in default by the lender.