Student Loan Borrowers in Default Get a Do-Over

About 7.5 million student loan borrowers with loans in default are set to get a fresh start — a chance to enter repayment in “good standing” — but only if they opt in.

Borrowers have until one year after the current payment pause expires — currently scheduled for Dec. 31, but expected to be extended — to enroll in the "Fresh Start" program and arrange to make payments, according to the Department of Education. During that year they won’t face collection costs or other punitive consequences of default, such as wage garnishment. But if they don't act before the one-year limit is up, their loans will remain in default.

The program was announced April 17 as part of the sixth extension of the federal student loan payment pause that first began in March 2020. But it took four months for details to emerge. The pause has now been extended seven times.

Student loans are delinquent when they're 30 days past due, and they default when the borrower hasn't made a payment for 270 days. Once that happens, federal aid for school is cut off and collections efforts begin, including wage garnishment or seizure of tax refunds. Damage to credit history is extensive: nine months of late payments, plus a default, make it more difficult for borrowers to qualify for credit cards, mortgages or auto loans. Federal loans are not easily discharged in bankruptcy courts, and there's no statute of limitations on collections efforts.

Who should seek a Fresh Start?

The Fresh Start program addresses most of the consequences of default by removing the penalties and making the rehabilitation process cheap and easy. The catch? You may have to make payments moving forward.

The program won’t be automatic, but there’s no downside to it, says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.

“For those who say, ‘I can’t afford to pay it,’ you might be able to if it’s out of default because you’ll have access to lower payment options,” Mayotte says. “You'll be able to potentially pursue forgiveness through existing forgiveness options.”

Income-driven repayment, for example, lowers payments to a portion of your income and extends your repayment to 20 or 25 years, after which the remaining balance is discharged. Payments under these plans could be as low as $0.

“Federal student loans have no statute of limitations, so it makes sense to get yourself out of default and get on a payment plan that — even if you don’t pay it off in 20 or 25 years — has a forgiveness at the end of it,” Mayotte says. “Whereas, if you stay in default, there is no automatic forgiveness.”

For those borrowers who want to enroll in this limited-time-only program, here’s what we know and don’t know.

Only federal student loan borrowers will get a fresh start

The Fresh Start program will apply only to borrowers with federal student loans, which include direct loans, Perkins loans and Federal Family Education Loan debt that’s held by the government and owned privately.

According to data supplied in March by the Education Department, approximately 7.5 million federal student loan borrowers have loans in default.

Loans in default that won’t be eligible for Fresh Start include:

• 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 commercially held FFEL loans that default after the end of both the student loan payment pause and the pause on collections.

Borrowers will have to say ‘yes’

Borrowers with eligible student loans must contact the Education Department’s Default Resolution Group or their loan holders to enroll in the program and arrange to make long-term payments.

Once borrowers make payment arrangements, their loans will be transferred to a new loan servicer that doesn’t manage defaulted loans.

It’s unclear how long that process will take or how quickly borrowers will be back in repayment after enrolling.

To make payment arrangements under the Fresh Start initiative, borrowers can:

• Visit myeddebt.ed.gov.

• Contact their individual loan holder.

• Call the Default Resolution Group at 800-621-3115.

You won't have to consolidate, rehabilitate or come up with a lump sum of cash in order to get out of default under the initiative. You just need to enroll and pay the agreed-upon monthly amount.

Borrowers can re-access repayment options and forgiveness

Borrowers with loans in default who enter into good standing will be able to access the entire suite of repayment options and loan forgiveness available.

That means borrowers will be able to enroll in a graduated repayment plan, extended repayment plan or income-driven repayment. They can also work toward Public Service Loan Forgiveness if their new payments qualify.

A fresh start for credit reports, too

Under Fresh Start, when borrowers make payment arrangements and have their loans transferred to a new servicer, they’ll see the default eliminated from their credit report, too.

Loans that have been delinquent for more than seven years will be removed from borrowers’ credit reports. It will also be easier to get new loans for borrowers who defaulted; the flag for “default” will be removed from the system that’s used by lenders to verify an applicant’s information.

Borrowers can access their credit reports for free at AnnualCreditReport.com.

Borrowers can get new loans to complete a degree

Borrowers in default are typically less likely to have completed a degree. As part of Fresh Start, schools are being advised to provide access to federal aid, which includes federal student loans, to borrowers in default. This is available to all borrowers with loans in default even if they don't apply for Fresh Start relief.

“Those who drop out have a much higher risk of default than those who get their degree or credential, and the default prevents them from finishing that degree — it’s a kind of a Catch-22,” Mayotte says. “Hopefully this will help them finish their degree so they can be in a position where they can afford to repay their student loans.”

Collections activities won’t restart for one year

Borrowers who don't take advantage of the Fresh Start initiative will not see collections activities until one year after the payment pause ends. That means you won't have your wages garnished or your tax refunds seized and you won’t face collection costs.