#1 Student Loan Lawyer
Updated on December 22, 2022
Before the pandemic shut down the U.S. economy, almost one-fifth of all 45 million federal student loan borrowers fell behind on their monthly payments and defaulted. Unlike private lenders, the government can’t simply write off the loans, sell them to third-party debt buyers, or wait for the statute of limitations to end. It’s forced to go after these borrowers, using extraordinary collection powers that let it garnish paychecks and confiscate tax refunds and Social Security benefits — all without a court order.
The Fresh Start initiative, which President Joe Biden first mentioned when he extended the student loan repayment and interest rate freeze on April 6, 2022, is the government’s effort to address the problem. Before the freeze ends, borrowers can dig themselves out of default and escape the department’s draconian collection system by getting a payment arrangement they can afford.
Ahead, learn how to apply for the Fresh Start Program.
What is the Fresh Start Program for student loans?
On April 6, 2022, the Biden administration announced it would move to clear the default status for millions of federal student loan borrowers who fell behind on their monthly payments before the Covid pandemic. As part of this Fresh Start initiative, defaulted borrowers would return to repayment without a past-due balance or collection fees. They’ll also have their access to financial aid restored —including Pell Grants and work-study — and their names removed from the CAIVRS database, making it easier to qualify for federally-backed mortgages.
The Education Department first shared with reporters it would use the initiative to automatically erase the defaults of all people with loans covered by the federal student loan payment pause.
NEWS - Biden admin is planning to automatically erase the defaults of millions of federal student loan borrowers -- part of effort to provide borrowers with "fresh start" once payments resume.— Michael Stratford (@mstratford) April 6, 2022
(We previously reported this was under consideration https://t.co/6j2VpMdtED) pic.twitter.com/wuCDkYUUaC
But when details were released months later, the department changed course and said borrowers had to opt into the program.
What are the benefits of the program?
Eligible borrowers who request a fresh start will have their loans returned to good standing, the black mark removed from their credit reports, and access to IDR plans, deferments, and forbearance restored. They’ll also regain eligibility for student loan forgiveness programs like Public Service Loan Forgiveness and Income-Driven Repayment Plan Forgiveness.
As part of the initiative, the department removed borrowers’ names from CAIVRS on July 10, 2022, opening up the possibility for borrowers to get a federally-backed mortgage. It’s also paused collection activity like wage garnishment and the offset of tax refunds and Social Security benefits for one year after student loan payments resume.
The department plans to report defaulted loans as “current” rather than “in collections” to credit reporting agencies early next year.
Loans that no longer appear on borrowers’ credit reports
The Department won’t report loans that have been delinquent for over seven years — even if the borrower enrolls in one of the income-driven repayment plans. For example, if the loans no longer appear on your credit report, getting out of default won’t put the loans back on your report. This change should increase borrowers’ credit scores, which should help them get better interest rates for credit cards, auto loans, and mortgages.
Impact on financial aid
The Education Department has removed the flag from borrowers’ accounts so they can submit a FAFSA application and get new federal loans, grants, and work-study aid. But students may not get state-based scholarships, grants, or other funds until the default is removed.
Why was the program created?
Early in the pandemic, a group of Democrats, led by Senator Elizabeth Warren of Massachusets and Raphael Warnock of Georgia, called on the Biden administration to erase the defaults from all federal student loans. They argued that since the CARES Act gave borrowers credit toward loan rehabilitation, defaulted borrowers had effectively completed the program without the need to formally enroll in it by completing messy paperwork.
That’s the benefit to the borrower. But there’s a benefit to the government as well. Before it pulled collections in-house during the pandemic, the Education Department spent hundreds of millions of dollars each year paying private debt collection companies to chase down payments from borrowers.
Sometimes they collected more than their fees. But often, the opposite was true. The Consumer Financial Protection Bureau found that collectors were sometimes paid as much as $40 for every $1 collected.
A program that cuts government spending costs while giving borrowers another shot at paying back their student debt is a win for both the lender and the borrower.
Who’s eligible for the program?
Fresh Start is only open to borrowers with defaulted federal student debt. Eligible loans include:
All Direct Loans.
Federal Family Education Loans, including those with a guaranty agency like ECMC or Trellis.
Ed-owned Perkins Loans.
If you defaulted on privately-held FFEL Program loans after March 13, 2020, your loans will automatically be returned to good standing before payments resume.
Related: When Do Student Loans Start Again?
These loans aren’t eligible for a fresh start:
Private student loans.
Defaulted Perkins loans held by a school.
Defaulted Health Education Assistance Loan Program loans
FFEL and Direct Loans that default after the payment pause ends.
Related: Student Loan Pause End Date
Similarly, if the government sued you and got a judgment for a defaulted student loan, it can’t be included in this program.
For more details, check out the Fact Sheet the U.S. Department of Education released.
Related: Are Student Loans Being Removed From Credit Reports?
How the program works
The Fresh Start Program pulls borrowers’ delinquent and defaulted loans into good standing without having to apply for loan consolidation or make nine monthly payments under the loan rehabilitation program. Instead, they must contact their loan holder and provide information about their marital status, family size, and discretionary income. That information will be sent to the new loan servicer so it can calculate the borrower’s monthly payment under the income-driven repayment plan that gives them the lowest payment amount.
For most borrowers, that will be the income-based repayment plan or the Revised Pay As You Earn Plan. Those with Parent PLUS Loans will be placed in the income-contingent repayment plan.
Borrowers with commercially held FFEL Loans will have their loans moved to Nelnet. Many of my clients with Ed-owned federal student loan debt have had their accounts moved to Aidvantage.
How to apply for a fresh start
The Fresh Start initiative doesn’t have an application. There is, however, a form you can submit on the Default Resolution Group website, MyEdDebt.ed.gov, to request access to the program. You’ll answer questions about your marital status, family size, income, etc.
Website to apply for Fresh Start student loan program
If you don’t have access to that site, call the DRG’s customer service team at 1-800-621-3115.
This option is only available to borrowers with Ed-owned student loans.
If you have an FFEL Loan held by a private lender, contact the loan holder or the guaranty agency. You can contact the Federal Student Aid Help Center by calling 1-800-433-3243 to find out which company manages your loans and how to contact them.
You’ll have one year after the student loan payment pause ends to make payment arrangements and get a fresh start.
Should you get a fresh start?
The only reason not to enroll in the Fresh Start initiative is if you want to settle your federal student debt for less.
The Education Department won’t accept settlement offers for loans in good standing. So if you’re ready to pay off your loans and are looking for a discount, then you’ll want to pass on a fresh start and instead ask the loan holder for your settlement options.
Keep in mind that a federal student loan settlement likely won’t save you much money. Typically, the department will knock off half of the outstanding interest and a bit of the principal balance. Plus, they’ll demand payment within 90 days.
If you don’t have that type of cash lying around, it probably makes more sense to escape default, clear your credit history, and take advantage of favorable repayment options, many of which lead to loan forgiveness.
Worried about your credit score? If the loans are no longer on your credit report, the Education Department won’t add those loans back to your report when you use the Fresh Start program. So if you use the program, you won’t have to worry about your credit score being harmed, your wages being garnished, or taxes being taken.
Operation Fresh Start is a unique, one-time program designed to help borrowers find a way out of default while reducing the impact on their credit. Those who use it will be put in a repayment plan based on their income and will have their eligibility for loan forgiveness programs reinstated. In my opinion, there are no downsides to the program.
Book a session with me to get tailored advice on tackling your student loans. We’ll examine your loans and circumstances to develop an approach to help you get debt relief quickly.
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