The U.S. Department of Education is giving federal student loan borrowers who’ve fallen behind on their debt a chance to get into current standing.
As part of its “Fresh Start” initiative, the 7.5 million student loan borrowers who are in default will be able to return to repayment without a past-due balance. The agency announced the program in April, and on Wednesday released more information on how borrowers may benefit.
Borrowers currently in default will have the opportunity to improve their credit records, shield themselves from any collection activity the government may be able to take against them — including wage garnishment — and restore their eligibility for federal student aid.
It’s not clear from the latest guidance exactly when borrowers can start taking steps for their fresh start, says Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers.
“There will be borrower communications and the Education Department’s website will be updated,” Buchanan said, as to when borrowers can begin the process.
The Education Department did not immediately respond to a request for comment.
Here’s what borrowers need to know about the new program.
Certain loans qualify, and others don’t
Eligibility depends on the kind of loans you have, and at what point the loans defaulted.
If you defaulted on any loans in the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program, you’re likely to be eligible. Defaulted Perkins loans held by the Education Department may also qualify.
Defaulted Perkins loans held by a school and private student loans won’t be included in the relief.
Most federal student loan payments have been on pause since March 2020, when the coronavirus pandemic hit the U.S. and crippled the economy. Former President Donald Trump extended the break several times, as has President Joe Biden.
If you default on your federal student loans after the payment pause ends, you’ll miss out on the opportunity.
The first step: Choosing a new repayment plan
Once the program launches, borrowers will start by choosing a repayment plan at MyEdDebt.Ed.Gov or by calling the Education Department’s Default Resolution Group at 800-621-3115, said higher education expert Mark Kantrowitz.
Your loans should then be transferred from the servicer that handles defaulted federal student loans — Maximus — to a new servicer.
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Once you have a new servicer and are enrolled in a payment plan, the default should be automatically cleared from your record, Kantrowitz said.
The opportunity is temporary. Borrowers will have a one-year window to switch into a new repayment plan, starting when the Covid-19 suspension of payments concludes. That’s currently set to happen Aug. 31, although experts anticipate another extension is forthcoming.
Take action as soon as you’re able, he added, “to avoid the last-minute rush.”
Look for credit report changes
Under the Fresh Start initiative, the Education Department will delete reporting on loans that have been delinquent for more than seven years. It will also report all other defaulted loans for eligible borrowers to credit reporting agencies as “current.”
After you get your loan transferred to a new servicer, you may want to order a free credit report to make sure your loans are no longer marked as delinquent, experts said.
Collection efforts to be temporarily suspended
The U.S. government has extraordinary collection powers on federal debts and it can seize borrowers’ tax refunds, wages and Social Security checks.
Thanks to the initiative, collection activity on defaulted federal student loans will be suspended for a year after student loan payments resume. Be aware that if you take a fresh start but then fall back into default after that period, you could be subject again to collections.
Eligible borrowers can apply for new federal aid
Borrowers with eligible defaulted federal student loans can apply for federal student grants, loans or work-study funds through the Free Application for Federal Student Aid, or FAFSA. They should be able to receive the aid even before the Fresh Start program is fully implemented later this year, according to the Education Department.
“The guidance emphasizes providing borrowers with a path to finishing their degrees,” Kantrowitz said. “This will provide them with a route to a better income, which will enable them to repay their student loans.”
Buchanan said any defaulted borrower who wants to access federal funding to return to school can reach out to their school’s federal student aid office now.
Payment pause may affect timeline
The payment pause on federal student loans is currently scheduled to expire this month, although the White House is considering extending it yet again.
“If the payment pause is continued, borrowers in default will not make any payments, just like borrowers who are not in default,” Kantrowitz said.
And the one-year window that defaulted borrowers will get to transfer to a new servicer only begins when the payment pause ends, he added.