Student Loan Fresh Start: The Operation

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Stanley Tate

#1 Student Loan Lawyer

Updated on September 3, 2022

When the federal student loan payment pause ends in January 2023, nearly 8 million Americans who are delinquent or in default will be able to get a fresh start from the Department of Education, with their accounts restored to good standing and default status removed from their credit reports. They’ll also have access to affordable student loan repayment plans and forgiveness programs like President Biden’s $10 thousand mass debt cancellation.

The Biden administration first announced the Fresh Start Program in April, but it didn’t release details on how the program would work until August. A fresh start isn’t automatic. Borrowers with defaulted federal student loans must work out a payment plan with the Default Resolution Group or their guaranty agency if they defaulted on a commercially held Federal Family Education Loan.

Those who set up a payment arrangement will have their loans moved to a non-default student loan servicer like Aidvantage, MOHELA, or Nelnet. But people who don’t take advantage of this unique opportunity by January 2024 will face collection efforts like wage garnishment and tax refund offset once more.

Here’s what you need to know about the student loan fresh start initiative.

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How to apply for the student loan Fresh Start Program

The Fresh Start initiative isn’t automatic. Eligible borrowers must opt into it by making payment arrangements with the collection agency handling their loans. Once they do, their loans will be transferred to a new student loan servicer.

You can find out what company has your defaulted federal student loans by checking studentaid.gov or calling Federal Student Aid at 1-800-433-3243.

It’s unclear how long the process from establishing a payment plan to returning to good standing will take or what the monthly payment amount will be. What is certain is that eligible borrowers have until one year after the moratorium ends — i.e., January 2024 — to take advantage of this unique opportunity. If they don’t do something about the debt before then, the chance to get out of default without having to consolidate or put down a lump sum of cash may be lost forever.

Download: Fresh Start Fact Sheet

Which loans are eligible for a Fresh Start?

Most defaulted federal student loan debt is eligible. But a handful of federal and private student loans don’t qualify.

Eligible Loans:

  • Loans made under the Federal Direct Loan Program, including Direct Consolidation Loans and Parent PLUS Loans.

  • Defaulted Federal Family Education Loans, including joint spousal consolidation loans.

  • Defaulted Perkins loans held by the Education Department.

Loans not eligible:

  • Private student loans, including federal loans refinanced with private lenders.

  • Defaulted Perkins Loans held by schools.

  • Loans from the Health Education Assistance Loan Program that have gone into default

  • Student loans with the U.S. Department of Justice.

  • Direct loans and FFEL loans that default after the end of the student loan payment pause — i.e., commercial-held FFEL Loans.

What the student loan fresh start will do:

  • Return all borrowers with Direct Loans and commercially held Federal Family Education Loans to good standing, including those with spousal consolidation FFEL Loans.

  • Take people off CAIVRS so they can get FHA, VA, USDA, and other government-backed mortgages.

  • Allow defaulted borrowers to use one of the income-driven repayment options to get a monthly payment that fits their budget.

  • Stop taking money out of borrowers’ paychecks, tax refunds, or Social Security benefits to pay for federal student loans in default until January 2024.

  • Tell credit reporting agencies that defaulted loans are “current” and not in collections.

  • Erase the default status — but not the late payments — from borrowers’ credit history with the three major credit bureaus.

  • Restore eligibility for loan forgiveness opportunities like the Public Service Loan Forgiveness ProgramPSLF Limited Waiver Opportunityincome-driven repayment plan forgiveness, the IDR Waiver, and so on.

  • Allow borrowers to receive new financial aid, including Pell Grants, scholarships, and federal student loans.

A second chance for people who default

Under normal circumstances, the process of getting federal student loans out of default is challenging — especially if borrowers don’t have a lump sum payment to clear the student loan debt. Consolidation is a straightforward option: borrowers combine the defaulted loans into a new, fixed interest rate loan. But going that route tacks the interest and collection fees onto the principal balance.

Alternatively, borrowers can rehabilitate their loans. The problem with that is two-fold. First, borrowers must work with private collection agencies that often provide shoddy customer service, which hinders borrowers’ efforts to get out of default. Second, they have to make nine out of 10 consecutive monthly payments on time before their loans are restored to good standing. Two missed payments, and borrowers have to start the process over again.

The Operation Fresh Start initiative does away with those fussy requirements and financially prohibitive options. And borrowers in default don’t have to wait months to return to good standing.

Put simply, this clean-slate action has the potential to help millions of federal student loan borrowers exit the pandemic in a better place with their defaulted debt than they were nearly three years ago.

Learn More: Defaulted Student Loan Forgiveness

Bottom Line

If your federal student loans are in default, help is here. The U.S. Department of Education will bring your loans current and restore your eligibility for flexible repayment plans, forgiveness programs, deferment, forbearance, and so on. But it won’t do so automatically. You have to work with a collection agency or loan holder to establish a long-term payment plan.

If you want help navigating the process, let’s talk. Schedule a call with me today. We can work together to develop a plan that helps you avoid collection activity, fits your current financial situation, and sets you up to meet your future goals before the Fresh Start period ends.

UP NEXT: Student Loan Forgiveness Programs

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