“Fresh Start”: What Defaulting Student Borrowers Need to Know

(NerdWallet) — When payments resume on federal student loans, borrowers whose loans were previously in default can get a fresh start and resume repayment in good standing.

The “Fresh Start” initiative is available for one year only. Borrowers must register if they want to participate.

The program was first announced on April 6 as part of the sixth extension of the federal student loan payment pause. It wasn’t until August 18 that the details emerged.

A defaulting borrower suffers lasting damage to their credit history. Additionally, they cannot receive other federal aid to return to school, and they face wage garnishment or garnishment of tax refunds and bills for collection costs.

The Fresh Start program removes these penalties if borrowers agree to enter a repayment plan. It does not require a lump sum cash to catch up or a loan consolidation.

How to make a fresh start

Borrowers should opt for Fresh Start, which will launch as soon as the student loan payment pause expires – currently scheduled for August 31. They must first make payment arrangements with the Ministry of Education’s Default Resolution Group or their loan holders. Once a long-term payment plan has been agreed, the loans will be transferred to a new loan manager.

It is not known how long the process from registration to payment will take.

Borrowers must use one of the following options to enter into Fresh Start payment arrangements:

  • 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 start from scratch

About 7.5 million borrowers have federal student loans in default, according to federal data. This amount includes overdue loans held by the Ministry of Education and defaulted loans held by guarantee agencies.

Fresh Start is only available to borrowers with federal student loans, including direct loans, government-held FFEL loans, and private FFEL loans. The following loans are not eligible:

  • Private student loans.
  • Perkins loans held by the school.
  • Loans from the Health Education Assistance Loan Program.
  • Loans under the jurisdiction of the United States Department of Justice.
  • Direct loans and FFEL loans held by companies that are in default after the end of the student loan payment pause and the pause on collections.

The fresh start will be reflected on credit reports

The negative default mark on borrowers’ credit reports will be removed as part of the fresh start, according to the Department of Education.

The removal of default on credit reports will only occur after borrowers have made payment arrangements and their loans have been transferred to a new servicer. It’s unclear how long it will take for your report to reflect the default wipe.

The initiative will also:

• Removing the “default” flag will be removed from the Credit Alert Interactive Voice Response System (CAIVRS), which is a federal database of delinquent federal debtors.

• Remove all loans over seven years past due from borrowers’ credit reports.

• Use a loan’s original default date if a borrower defaults again after Fresh Start. This means that a new default will not restart the seven-year delay to appear on a borrower’s credit report (loans past due for more than seven years do not appear on reports).

You can access your credit report for free through the government-authorized site AnnualCreditReport.com. It is also available for free via NerdWallet.

No collection until Fresh Start expires

All collection activities through the Treasury Offsetting Program on Defaulted Federal Student Loans are suspended until the Fresh Start initiative ends. These include wage garnishment, garnished tax refunds and collection costs.

Borrowers who do not take advantage of Fresh Start can expect collection activities and credit reporting to resume once the Fresh Start initiative ends.

Access to refund options and discount is restored

The return to good standing means that borrowers who were in default can now access income-driven repayment plans and work towards forgiveness of public service loans, or PSLFs.

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. Payouts under an income-based plan can be as low as $0.

However, according to the Department of Education, any months spent in default, including during the break, do not count toward PSLF or the income-based refund rebate under current federal regulations.

” MORE: Student loan forgiveness: what’s being fixed?

A second blow for rehabilitated and defaulting borrowers

Usually, there are only three ways out of default: rehabilitation, consolidation, or full loan repayment. But rehabilitation and consolidation are a one-time operation; if you default again, your only option is to repay the entire debt.

New start provides an alternate default path if you’ve used these methods in the past and re-entered default. And under the initiative, any borrower who rehabilitated their loans during the payment pause will also have the option to rehabilitate again if they default again.

Access federal student aid – without enrolling in Fresh Start

One aspect of Fresh Start requires no registration: Schools are advised to allow defaulting borrowers to access federal student aid, which includes federal loans, co-op studies, and Pell grants.

Borrowers in default are less likely to have a university degree. But defaulting on a loan means losing eligibility for federal aid, which can be crucial for college completion. Having access to federal aid again means borrowers could return to school and complete their degree programs.

Don’t expect new defaults for a while

It takes about nine months without payment – 270 days – for an account to default. When payments restart on September 1 as scheduled, no new defaults will reoccur until next year, at the earliest.

” MORE: Are you at risk of default?

If a borrower who agrees to get out of default ends up defaulting again, their quickest solution is student loan rehabilitation. It is a repayment process in which a borrower agrees to make an agreed payment amount nine times in 10 consecutive months.

It is unclear how the Department of Education plans to prevent re-defaults. It is also unclear how the ministry plans to reach all borrowers who had loans in default before the break. In January, a Government Accountability Office report found that 25% of borrowers in default did not have an email address on file with the Department of Education.

” MORE: How the student loan pause went for borrowers

How to Find Extra Student Loan Help

Legitimate student loan assistance organizations will not call, text, or email borrowers with debt resolution offers. Avoid “debt relief” companies that promise immediate forgiveness of student loans. If it sounds too good to be true, it usually is.

Here are some approved student loan assistance resources to consider for information, advice, or both; these are established organizations with verified backgrounds:

Many of these organizations offer advice for free. However, you may have to pay fees, for example with a certified non-profit credit counseling agency or hire a lawyer.

About Sharon Joseph

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