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Department of Education offers second chance to defaulting student loan borrowers

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Drazen Jigiku | In Stock | Getty Images

The U.S. Department of Education is giving overdue federal student loan borrowers a chance to get back on track.

As part of its ‘Fresh Start’ initiative, the 7.5 million student loan borrowers in default will be able to get back on track with no outstanding balances. The agency announced the program in April, with more information on how borrowers will benefit on Wednesday.

Borrowers who are currently in default have the opportunity to improve their credit record, protect themselves from any collection actions the government may be able to take against them, and reinstate their eligibility for federal student aid.

With the latest guidance, it’s not clear when borrowers will be able to make a fresh start, said Scott Buchanan, executive director of the Student Loan Services Alliance, an industry group of federal student loan servicers.

As to when borrowers can begin the process, Buchanan said, “We are in contact with borrowers and will update the Department of Education website.

The Ministry of Education did not immediately respond to a request for comment.

Here’s what borrowers should know about the new program.

Certain loans are eligible, others are not

Eligibility depends on the type of loan you have and when the loan defaulted.

If you have defaulted on either the William D. Ford Federal Direct Program or Federal Family Education Loan Program loans, you may be eligible. It also covers defaulted Perkins loans held by the education sector.

Perkins loans in default held by schools and private student loans are not eligible for relief.

Most federal student loan payments have been suspended since March 2020, when the coronavirus pandemic hit the United States and paralyzed the economy. Former President Donald Trump has extended his break several times, as has President Joe Biden.

If you default on your federal student loans after the suspension of payments is over, you’re missing out on an opportunity.

First step: choosing a new repayment plan

Look for credit report changes

Under Fresh Start Initiative, Education Department removes reports on loans overdue for more than seven years. It also reports all other defaulted loans of eligible borrowers to the credit bureaus as “current”.

After transferring your loan to a new servicer, it’s a good idea to order a free credit report to make sure the loan isn’t overdue, experts say.

Pause collection activities

The U.S. government has extraordinary collection powers over federal debt, and can garnish borrowers’ tax refunds, wages, and Social Security checks.

Thanks to this initiative, default federal student loan collection activity will be suspended for one year after student loan payments resume. Note that after a fresh start, if you revert to defaults after that period of time, it may become eligible for collection again.

Eligible borrowers can apply for new federal aid

Borrowers with eligible defaulted federal student loans can apply for federal student grants, loans, or study funding through the Free Application for Federal Student Aid (FAFSA). They should be able to receive assistance even before the Fresh Start program is fully implemented later this year, according to the Department of Education.

“The guidance emphasizes providing borrowers a path to a degree,” Kantrowitz said. “This opens the door to better income and allows me to pay off my student loans.”

Buchanan said defaulting borrowers who want access to federal funding to return to school can contact their school’s federal student aid office now.

Pausing payments can impact timelines

The federal student loan moratorium is currently set to end this month, but the White House is considering extending it further.

“If payment suspensions continue, defaulting borrowers will stop making payments just like non-defaulting borrowers,” Kantrowitz said.

He added that the one-year window for defaulting borrowers to transfer to a new servicer will only begin when the suspension of payments ends.