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.

At that point, a federal office again assumes the balance of the loan, paying off the bank. This is when real problems begin.

Once the status on the loan is considered to officially be in default, the federal government will take any means necessary to collect the balance of the loan, in addition to interest, fees and penalties. Those steps can include placing a mandatory lien on a percentage of your paycheck, seizing your tax refunds, and in extreme cases they can seize your bank account assets, investment accounts, Social Security payments and more.

Disability, age and even death does not stop collection efforts. If you are married and die, your spouse becomes responsible for the balance of the debt. So any funds left to your estate can be seized. If that is insufficient, your spouse’s Social Security or pension can be penalized until paid in full.

Once you default on a federal student loan, the negative mark on your credit rating is basically permanent. It does not roll over in 10 years as other debts do. It follows you for life. Declaring bankruptcy does not apply to federal student loans at all.

In cases where the government is unable to collect the balance of the loan, the federal government (meaning you, the taxpayer) assumes the balance of the loan.

This is the extent to which the federal government goes to insuring the profits of corporate banks. Meanwhile, very little protection is offered to the student/borrower. If a school fails before the course is completed, that does nothing to erase or lessen the debt owed by the student. With no protections regarding age, extended illness or even death, you can understand clearly that your money is worth more than your life to our government.

I have explained in recent weeks how the Federal reserve (which is not a government entity, yet determines federal national debt) is bailing out banks right this minute. Banks which are at risk of failing due to taking on risky investments. By the time the Repo Market bailout ends, the risk to the federal debt will exceed $4 trillion, which is far more expensive than paying off all student loans would cost.

The unbalanced system in favor of banks and rich investors, backed by the government, with the US government acting as a collection agency on their behalf, is one of the biggest reasons to take universal adult education seriously. Add this to the benefits to the general economy in terms of disposable income translated to consumer spending which would create jobs and it simply makes sense. Right now the interest applied to decades of student loan debt does nothing for the economy, it creates virtually no jobs at all. It merely serves to enrich the already rich. The debt lessens the ability of borrowers to qualify for mortgages, apartment rental agreements, vehicle loans and often disallows a borrower from being able to afford medical care. In many cases, it impacts food security for the borrower. This is a loan shark system of the highest degree which needs to end.

There is absolutely no excuse that “the richest country on earth” cannot afford universal adult education at the 2–4 year degree level for our citizens. Not when nearly every other developed country has such a system in place. There is no other country, has never been another country, with this level of student loan debt, this level of bankruptcy for what amounts to basic needs and services for our own citizens, only to prop up the profits of the privileged.

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