‘Fresh start’: What student loan borrowers in default need to know
(NerdWallet) – When payments resume on federal student loans, borrowers with loans previously in default can receive a fresh start and re-enter repayment in good standing.
The “Fresh Start” initiative is available for one year only. Borrowers must enroll if they want to take part.
The program was first announced on April 6 as part of the sixth federal student loan payment pause extension. It wasn’t until Aug. 18 that details emerged.
A borrower in default endures long-lasting damage to credit history. In addition, they can’t receive other federal aid to return to school, and they face wage garnishment or seizure of tax refunds and bills for collection costs.
The Fresh Start program removes those penalties if borrowers agree to enter a repayment plan. It doesn’t require a lump sum of cash to catch up, or loan consolidation.
How to get a Fresh Start
Borrowers must opt into Fresh Start, which launches as soon as the student loan payment pause expires — currently scheduled for Aug. 31. They must first make payment arrangements with the Department of Education’s Default Resolution Group or their loan holders. After a long-term payment plan is agreed upon, loans will be transferred to a new loan servicer.
It’s unclear how long the process from enrollment to payment will take.
Borrowers should use one of the following options to make payment arrangements under the Fresh Start initiative:
- Visit myeddebt.ed.gov
- Contact their individual loan holder.
- Call the Default Resolution Group at 1-800-621-3115.
Here’s what else we know about the initiative.
7.5 million borrowers to get a fresh start
Approximately 7.5 million borrowers have federal student loans loans in default, according to federal data. This amount includes defaulted loans held by the Education Department and defaulted loans held by guaranty agencies.
Fresh Start is only available to borrowers with federal student loans including direct loans, government-held FFEL loans and privately-held FFEL loans. The following loans are not eligible:
- Private student loans.
- School-held Perkins Loans.
- Health Education Assistance Loan Program loans.
- Loans under the purview of the U.S. Department of Justice.
- Direct loans and commercial-held FFEL loans that default after the end of both the student loan payment pause and the pause on collections.
The fresh start will be reflected on credit reports
The negative mark of default on borrowers’ credit reports will be removed as part of the fresh start, according to the Education Department.
The removal of the default on credit reports will only happen after borrowers make payment arrangements and have their loans transferred to a new servicer. It’s unclear how long it will take for your report to reflect the default erasure.
The initiative will also:
• Remove the flag for “default” will be removed from the Credit Alert Interactive Voice Response System (CAIVRS), which is a federal database of delinquent federal debtors.
• Remove any loans that have been delinquent for more than seven years from borrowers’ credit reports.
• Use a loan’s original date of delinquency if a borrower defaults again after Fresh Start. That means a new default won’t restart the seven-year timeline for appearing on a borrower’s credit report (loans that are delinquent for longer than seven years do not appear on reports).
You can access your credit report for free through the government-authorized AnnualCreditReport.com. It is also available for free through NerdWallet.
No collections until Fresh Start expires
All collections activities through the Treasury Offset Program on federal student loans in default are suspended until the Fresh Start initiative has ended. These include wage garnishment, seized tax refunds and collection costs.
Borrowers who do not take advantage of Fresh Start can expect collections activities and credit reporting to resume when the Fresh Start initiative is over.
Access to repayment options and forgiveness is restored
Re-entering good standing means borrowers who were in default can now access income-driven repayment plans and work toward Public Service Loan Forgiveness, or PSLF.
According to the April findings of a New York Federal Reserve survey, borrowers enrolled in an income-driven repayment plan are less likely to have difficulty repaying their debt. Payments under an income-driven plan can be as low as $0.
However, according to the Education Department, all months spent in default, including during the pause, do not count toward PSLF or income-driven repayment forgiveness under current federal regulations.
» MORE: Student loan forgiveness: What’s getting fixed?
A second shot for borrowers who rehabilitated and defaulted
Usually there are only three ways out of default: rehabilitation, consolidation or paying off the loan in full. But rehabilitation and consolidation are a one-time-only deal; if you default again, your only option is to repay the entire debt.
The Fresh Start provides another path out of default if you’ve used these methods in the past and re-entered default. And as part of the initiative any borrower who rehabilitated their loans during the payment pause will also have the option to rehabilitate again should they default once more.
Access federal student aid — without enrolling in Fresh Start
One aspect of Fresh Start requires no enrollment: Schools are being advised to allow borrowers in default access to federal student aid, which includes federal loans, work-study and Pell Grants.
Borrowers in default are less likely to have a college degree. But defaulting on a loan means losing eligibility for federal aid, which can be crucial to college completion. Gaining access again to federal aid means borrowers could return to school and complete their degree programs.
Don’t expect new defaults for awhile
It takes roughly nine months without a payment — 270 days — for an account to default. When payments restart on Sept. 1 as scheduled, then any new defaults won’t happen again until next year, at the earliest.
» MORE: Are you at risk of default?
If a borrower who consents to get out of default ends up re-defaulting, their quickest way out is through student loan rehabilitation. It’s a repayment process in which a borrower agrees to make an agreed-upon payment amount nine times within 10 consecutive months.
It is unclear how the Education Department plans to prevent re-defaults. It’s also unclear how the department plans to reach all borrowers who had loans in default before the pause. In January, a Government Accountability Office report found that 25% of borrowers in default do not have an email address on record with the Education Department.
» MORE: How the student loan pause has played out for borrowers
How to find additional student loan help
Legit student loan help organizations won’t call, text or email borrowers with offers of debt resolution. Avoid “debt relief” companies that promise immediate student loan forgiveness. If it sounds too good to be true, it usually is.
Here are some vetted student loan help resources to consider for information, advice or both; they are established organizations with verified histories:
Many of these organizations offer advice for free. However, you may need to pay a fee, such as with a certified nonprofit credit counseling agency or to hire an attorney.
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