The way federal guaranteed student loans work is that when the borrower defaults, the federal government steps in and pays the loan. This eliminates the risk for the lender which is why interest rates could be kept lower than they would otherwise. But when the federal government pays that debt, it steps in the shoes of the creditor and you end up owing the Department of Education. It is important to understand that the payoff of your original loan by the Department of Education does not eliminate your debt, it just transfers the debt from the original creditor to the government. And because the federal government is now your creditor, it can attach your tax refunds, among other things to collect what you owe. Since it is extremely difficult to get student loans discharged in bankruptcy you are going to need to sit down and work out how you are going to deal with those student loans.

