By Amy Miller, AFC®
With student loan repayment set to begin in October, we’re reviewing what borrowers need to know about the new plan to cancel $39 Billion for 804,000 borrowers that was recently announced by the Biden Administration. This month, we’ve looked at the Income-Driven Repayment Plans and the Public Service Loan Forgiveness program. This week we’re focusing on Student Loan Default and the Fresh Start Program.
Student Loan Default
There are 7 million student loans in default and around 4 million new student loans entering default each year, according to a 2023 Education Data Initiative report.
Typically, there are only two ways to get out of default – Consolidation or Rehabilitation
Consolidation is the process of refinancing and combining student loans into a new direct loan. This will often allow for more affordable payments and will open eligibility for forgiveness programs.
Rehabilitation is a process that allows students to get out of default by making a set number of consecutive payments under an agreement. Most rehabilitation plans are based on 10 months of repayment but could be as little as 4 months or as long as 12 months, depending on the lender.
Fresh Start is an initiative that was recently created by the U.S. Department of Education (ED) as a pathway for borrowers to get out of default on their student loans more quickly and easily.
The Fresh Start Program does the following for borrowers:
- Immediately restores payment options, including Income-Driven Repayment Plans
- Immediately restores Title IV eligibility, allowing students precluded from returning to school to go back and receive aid from an eligible institution
- Restores one-time rehabilitation if used during the payment pause
- Protects borrowers from collection efforts and removes negative reporting on credit reports
Loans Eligible for Fresh Start:
- William D. Ford Federal Direct Loans
- Federal Family Education Loans (FFEL), including loans held by the ED or commercially
- ED-held Perkins Loans
- Loans in default before March 13, 2020. (Because of the payment pause and other ED guidelines, no borrowers should have defaulted after this date)
Ineligible Defaulted Loans:
- School-held Perkins Loans
- HEAL Program Loans
- Student loans remaining with the Department of Justice
- Direct Loans and FFEL loans that default after the payment pause, which ends in October 2023
Action Items and Timelines
Through Fresh Start to remove themselves from default, borrowers have one year after the payment pause ends (September 2024) to do one of two things:
- Communicate with the Default Resolution Group (DRG) or your guaranty agency to request to enter the program. You can do this in three ways:
- Online: Log in to your account on myeddebt.ed.gov
- Phone: Contact the DRG at 1-800-621-3115
- Mail: Write a request letter that includes the borrower’s name, social security number, and date of birth. The letter needs to clearly state the request to participate in the Fresh Start Program to bring loans back into good standing. Mail to P.O. Box 5609, Greenville, TX 75403
- Request Title IV aid at an eligible school. Schools will need to get a signed statement from the borrower agreeing to transfer the defaulted loan to a non-default servicer.
Borrowers who fail to take either of these actions within the one-year timeframe will automatically be placed back into default using the original date of delinquency.