If You Defaulted on Student Loans, The Fresh Start Program Offers a Second Chance

If You Defaulted On Student Loans, The Fresh Start Program Offers A Second Chance
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If you’ve fallen behind on your federal student loans, help could be on the way.

You probably know about the pause on federal student loan payments, and you’ve heard about President Biden’s student loan forgiveness plan, but the Department of Education is offering additional relief for the roughly 7.5 million borrowers with student loans in collections.

If you’re one of these borrowers, the Fresh Start Program can give you an opportunity to make your loan current again, renew your access to federal loan payment assistance and remove damaging information from your credit reports.

“This program will help protect borrowers from a punitive student loan default system,” says Angelique Palomar, spokesperson for The Institute for College Access & Success. “For the first time for many struggling borrowers, they can see a light at the end of the tunnel.”

Applications for the Fresh Start program will be accepted for up to one year after the Covid-19 payment pause ends, which is scheduled to expire on December 31, 2022.

What Is the Fresh Start program?

The Fresh Start program, which was announced in April 2022, is designed to help borrowers pull their federal student loans out of collections. Here’s how the program can help you:

  • Get your loans back in good standing. Loans will be moved out of default, even if you’ve already used your one-time loan rehabilitation option.
  • Stop debt collections. You can halt attempts to collect the debt, including the withholding of tax and federal benefits, wage garnishment and collection calls.
  • Payment relief options. Become eligible for payment assistance again, including income-driven repayment as low as $0 per month, loan forbearance, deferment and student loan forgiveness.
  • Money for school. Regain the chance to apply for federal student aid, including grants, loans and federal work study, to help you return to school, if desired.
  • Clean up your credit. The record of missed student loan payments will be removed from your credit reports, and your student loan status will be changed from “in collections” to “current.”

Betsy Mayotte, president of The Institute of Student Loan Advisors, calls this a “huge” opportunity for anyone with federal student loans in collections.

“Some of these borrowers have been stuck in default with no option to resolve it other than by paying the loan in full,” Mayotte says, “so to give these borrowers a second chance could be extremely impactful to their long-term financial health.”

According to Ethan Dornhelm, vice president of scores and predictive analytics at FICO, the program could result in a substantial improvement to some borrowers’ credit scores.

“Thirty-five percent of FICO score calculation is driven by a consumer’s past payment history,” he says, so removing frequent, recent or severe missed payments from your credit reports could mean big score improvements.

This is especially good news for borrowers who are in good standing with their other debts. “Those consumers with little to no delinquency information in their credit file aside from the student loans in question likely stand to gain the most,” says Dornhelm.

Who Is Eligible for Fresh Start?

The Fresh Start program has no income criteria and you don’t have to pay a fee or send money to enroll in the program.

You simply have to be in default—meaning you were at least 270 days behind—on one or more of the following loan types, prior to the Covid-19 payment pause (March 13, 2020):

If your FFEL loan went into default during the Covid-19 payment pause it doesn’t qualify for Fresh Start but it can still be rehabilitated as part of other Covid-19 relief.

Still unsure if you qualify for Fresh Start? You can contact the Default Resolution Group at 1-800-621-3115 to find out.

How to Apply for Fresh Start

The application process is still somewhat unclear, but the Department of Education says it will conduct extensive, proactive outreach to let eligible borrowers know when they can enroll in Fresh Start. You can expect to be contacted via email or regular mail.

In the meantime, here are some tasks you can act on now.

Contact Your Loan Servicer Right Away

Palomar recommends making sure your loan servicer has your current contact information, so they can reach you with timely updates and notices. If you’re not sure who to contact, check your most recent student loan bill so you can find out who your loan servicer is.

Look Into Payment Plans

You’ll have one year after the federal student loan pause to set up a payment arrangement with your new, non-default loan servicer.

Mayotte recommends learning about your repayment and forgiveness options ahead of time, which you can do by visiting myeddebt.ed.gov, contacting the loan servicer or by calling 1-800-621-3115.

“Do your homework and choose a repayment plan you can afford once the loan is out of default. You certainly don’t want to go through the program only to default again,” she advises.

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