Although the COVID-19 payment pause provided relief for borrowers with defaulted student loans that reprieve has come to an end.

However, there is good news: the Fresh Start program offers a long-term solution. This program helps borrowers pull their loans out of default and provides affordable payments. According to the Department of Education, half of Fresh Start participants qualify for monthly payments as low as $0.

What is Fresh Start?

Fresh Start is a one-time, temporary program from the U.S. Department of Education (ED) that provides support to borrowers with defaulted federal student loans. By using Fresh Start, you can take advantage of various benefits to restore your financial well-being.

Automatic Benefits of Fresh Start

Eligible borrowers automatically receive many of the benefits of Fresh Start without enrollment.

These benefits include:

1. Restored Access to Federal Student Aid: Borrowers regain eligibility for federal student aid, including loans and grants. This opens up opportunities to pursue further education and potentially enhance your ability to repay your loans.
2. Halted Collections: The collections relief you received during the COVID-19 payment pause continues under Fresh Start. This means that the government will not withhold or garnish your tax refunds, wages, and Social Security payments. Additionally, you will no longer receive collection calls.
3. Eligibility for Other Government Loans: Fresh Start removes your default status from the government credit reporting system (CAIVRS). This improves your eligibility chances for certain types of government-backed loans, such as mortgages.
4. Ability to Rehabilitate Loans Multiple Times: Unlike the usual limitation of rehabilitating loans only once, Fresh Start provides a new remedy. Fresh Start doesn’t count as your one chance at rehabilitation. Even if you’ve already rehabilitated your loans before, Fresh Start provides you with another chance to get your loans back on track.
5. Improved Credit Reporting: Beginning in December 2022, the Department of Education reported the defaulted loans held by them as “current” rather than “in collections” to credit reporting agencies. Guaranty agency-held loans also received this benefit starting in February 2023.

Unfortunately, the automatic benefits for all defaulted borrowers end September 30, 2024. Borrowers who enroll in the Fresh Start program to get out of default by October 1, 2024 can lock in these benefits long-term.

Benefits of Enrolling in Fresh Start

In addition to securing the automatic benefits indefinitely, the borrowers who enroll in Fresh Start receive additional perks.

These additional benefits include:

1. Access to Income-Driven Repayment (IDR) Plans: Fresh Start participants can enroll in an income-driven repayment plan. In IDR plans, monthly payments are based on income and family size. This ensures that your payments are affordable, with some borrowers paying as little as $0 per month.
2. Eligibility for Student Loan Forgiveness Programs: Defaulted loans are not eligible for loan forgiveness programs. However, by utilizing Fresh Start and exiting default, you regain eligibility for forgiveness programs like Public Service Loan Forgiveness.
3. Access to Short-term Relief (Forbearance and Deferment): Once you’re out of default, Fresh Start allows you to request short-term relief options such as forbearance and deferment. These can provide temporary financial relief during challenging times.

How to Enroll in Fresh Start

To take advantage of Fresh Start and get out of default, borrowers need to contact their loan holder, whether it’s the Department of Education or a guaranty agency. If you’re unsure who holds your loans, call the Department of Education at 1-800-621-3115 (TTY 1-877-825-9923) for assistance.

Borrowers with loans held by the Department of Education have three ways to enroll in Fresh Start. Note: To enroll in Fresh Start, you must use one of these methods before October 1, 2024.

• Online: Log in to your account at myeddebt.ed.gov and initiate the Fresh Start process. According to the Department of Education, the online option is the easiest enrollment method.
• Phone: Call 1-800-621-3115 (TTY 1-877-825-9923) to speak with a representative and request Fresh Start. The Department of Education estimates that this call will take about 10 minutes.
• Mail: Write to P.O. Box 5609, Greenville, TX 75403. In your letter, the Department of Education asks that you include your name, social security number, date of birth, and the following: “I would like to use Fresh Start to bring my loans back into good standing.” If you’re using this method, you must postmark your letter before October 1, 2024.

What Happens After Enrollment?

Borrowers that sign up for Fresh Start will see the following happen:

• Your loans get transferred from the Default Resolution Group or a guaranty agency to a new loan servicer.
• The defaulted loans get changed to “in repayment” status.
• The record of your default is removed from your credit report.
• Once your loans have been transferred, you will receive communications from your new loan servicer. Within about a week after that, you’ll be able to apply for an IDR plan.

The Department of Education automatically enrolls Fresh Start borrowers in the Standard Repayment Plan. However, the Department estimates that around 80% of those borrowers elect to apply for an IDR plan. Borrowers electing this route may want to verify that they are signing up for the best Income-Driven Repayment Plan for their circumstances.

It’s important to note that you can’t apply for an IDR plan until the Department finishes processing your Fresh Start enrollment. This can take a couple of weeks. The Department also estimates that it takes 4-6 weeks for most borrowers’ loans to transfer to their new non-default loan servicer.

Student Loans Eligible for Fresh Start

Unfortunately, not all student loans are eligible for the Fresh Start program.

Notably, private loans cannot benefit from Fresh Start. The program is only available to borrowers with federal student loans.

The following federal student loans are eligible for Fresh Start:

• Defaulted William D. Ford Federal Direct Loan (Direct Loan) Program loans
• Defaulted Federal Family Education Loan (FFEL) Program loans
• Defaulted Perkins Loans held by the Department of Education

The following loans are not eligible for Fresh Start:

• Defaulted Perkins Loans held by schools
• Defaulted Health Education Assistance Loan Program loans
• Student loans remaining with the U.S. Department of Justice for ongoing litigation
• Direct Loans that default after the end of the COVID-19 student loan payment pause
• FFEL Program loans that default after the end of the COVID-19 student loan payment pause

Additionally, FFEL loans that defaulted during the COVID-19 payment pause are not eligible for Fresh Start. However, they will be taken out of default as part of the expanded COVID-19 relief.

Confused about Eligibility? If you are not sure whether or not your loans are eligible for Fresh Start, the easiest way to verify eligibility is to call the Department of Education Default Resolution Group at 1-800-621-3115 (TTY 1-877-825-9923).

Final Thoughts

Defaulted federal student loans can feel overwhelming, but Fresh Start offers a lifeline for borrowers seeking a way out.

By taking advantage of this program, you can restore access to federal student aid, improve your credit standing, and establish an affordable repayment plan.

The window to apply for Fresh Start ends September 30th, 2024. Missing this deadline would be a devastating mistake.

The post Fresh Start Offers Simplified Path Out of Federal Student Loan Default appeared first on The Student Loan Sherpa.

Unemployment or underemployment does not have to get in the way of repayment of federal student loans, regardless of the size of the loan balance. Income-driven repayment plans mean that nearly all federal borrowers should be able to avoid delinquencies and defaults.

Recent data from the Department of Education shows that the default rate is on the decline, but with over 1 in 10 borrowers defaulting on their loans, the default rate is much higher than necessary.

What if I can’t afford my student loan bill?

One of the mistakes many borrowers make is that they assume they have to pay the amount due on their monthly student loan bill. This is a reasonable assumption. Typically, when any statement comes in the mail, that is the amount you owe, and there is little room for negotiation.

Federal student loans are much different. For most borrowers, the monthly bill is calculated to pay off your student loans in ten years. This is called the standard repayment plan. The standard repayment plan is also the most expensive option.

The federal government has several repayment plans in place that allow borrowers to pay what they can afford rather than what they owe. These income-driven repayment plans can often result in monthly payments of $0. Borrowers are expected to pay as little as 10% of their discretionary income towards their student loans. Best of all, if you make payments under an income-driven repayment plan for 20 to 25 years, any remaining student loan balance can be forgiven. If you work for the government or a non-profit, the balance can potentially be wiped away after ten years of payments.

I don’t even know who to pay

Loans transferring between federal student loan servicers can make things difficult. Fortunately, there is a fairly easy way to track down the people responsible for collecting your student loan bills. (These are also the companies tasked with answering your student loan questions and helping you manage your balance.)

If you don’t know who you should be talking to or who you should be paying, visit the Department of Education’s Federal Student Loan Database. In this database, you will be able to learn the type of loans you have, the balance, interest rate, and loan servicer contact information.

What if my loan servicer won’t work with me?

The quality of federal student loan servicing can be pretty low. Their customer service representatives are underpaid and poorly trained to help people navigate their federal loans. Unfortunately, you are stuck working with them.

However, there are a couple of tricks that you can use to make sure things go as smoothly as possible. First, do your homework before calling. Research the plan you want and investigate the questions that you have. Second, if you are not getting the help you want from the person you are talking to, call back again later. Within each federal loan servicer office, there are good people, and there are bad people. If you get the chance to talk to someone very helpful, try to get their information so that you can directly contact them next time you have an issue or question.

One helpful tool from the Department of Education is the Federal Student Loan Repayment Estimator. This tool gives borrowers an estimation of their monthly payments on all of the various federal repayment plans. This resource can provide a starting point for discussions with loan servicers.

What if my loans are already delinquent or in default?

Fixing a delinquent loan can normally be addressed by calling your loan servicer. If you are behind and cannot afford payments, they will help you get things fixed so that you can make payments based upon your income rather than what you owe.

Fixing a loan in default can take a bit more work. Loans can get out of a default status through consolidation or rehabilitation. The National Consumer Law Center has a nice summary of the two routes to getting loans out of default. The Department of Education also has some detailed information on the process of getting out of default.

Is being in default a big deal?

Being in default causes many different issues. In your daily life, you can be constantly annoyed with collection phone calls. Your finances will take a beating because being in default will destroy your credit score. Your loan balance will grow quickly due to late fees and interest, making your situation worse with each passing day.

Because the loans are owned by the federal government and not a private company, there are also many powers that the government has to collect your debt. The National Consumer Law Center has a nice explanation of the things the government can do to collect your student debt.

Bottom Line

Being in default sucks. However, even if you have no income, there are ways to keep your debt current and under control.

The post No Excuse To Be Deliquent Or In Default On Your Federal Student Loans appeared first on The Student Loan Sherpa.

This week I received an email from someone seeking advice on how to deal with her defaulted federal student loans. Specifically, she wanted to know if direct loan consolidation was a better option or if it was better to rehabilitate her loans. The reader’s name and email have not been included in this particular mailbag article due to the sensitivity of the situation.

When federal student loans are in default, the options are not particularly attractive.

Both choices, rehabilitation and consolidation, have downsides. However, both options are far better than letting the loans stay in default. In fact, with late fees, compounding interest, and potentially court fees, being in default is very expensive.

Because all federal loans have borrower protections like income-driven repayment plans and loan forgiveness, staying out of default in the future is manageable.

What is the difference between rehabilitating a loan and consolidating a defaulted loan?

Rehabilitation and consolidation both accomplish the same goal… getting a federal student loan or loans out of default.

In order to rehabilitate loans, borrowers must work with their loan servicers to get on a monthly payment plan. Rehabilitation requires the borrower to make nine payments in a ten-month period to bring the loan out of default. This has to be done for each loan that is in default.

Consolidation requires the borrower to go through federal direct consolidation. Consolidating loans means that the old loans will be paid off in and a new consolidated loan will be created.

Which route is the fastest?

Loan rehabilitation takes nearly a year, and it is necessary for the borrower to work with each lender to bring all of their loans out of default.

Consolidation, by comparison, is a much faster process. Filling out the paperwork can be done very quickly. The Department of Education estimates that the online application only takes 30 minutes to complete.

Once the application is submitted, it typically takes the Department of Education people about 30 days to collect all of the necessary information so that all of the old loans can get paid off.

At that point, the borrower receives notice of the consolidation and the process is finalized. In total it can take a couple of months, but little time and effort is required from the defaulted borrower.

Which approach will help credit scores more?

This is one area where rehabilitation gets a big edge. By rehabilitating loans, the notation on the credit report about the default will be removed.

The late payments will still be on the report, so it doesn’t fix everything, but getting rid of the default is a big plus.

By consolidating the loans, the default will remain on the credit report for up to 7 years. As a result, going with the immediate consolidation route does more damage to credit scores.

Are there fees to worry about?

This is one area that hurts regardless of the route selected.

Consolidation can result in fees up to 18.5% while rehabilitation can result in fees up to 16%.

However, the Department of Education at times will waive the 16% rehabilitation fee, so it is important for borrowers to ask about the potential savings.

When will the collectors go away?

The collectors stop as soon as the loans are consolidated or as soon as the rehabilitation process has been completed.

Once the loans are brought out of default, borrowers should not be contacted again as long as the loans stay current.

Tips for staying out of Default

The best part about getting federal loans out of default is the many great federal repayment plans. Income-based repayment plans, such as PAYE, ensure that even unemployed borrowers are able to keep their loans current.

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Materials referenced and further reading:
The Student Loan Borrower Assistance Factsheet
NOLO information on consolidation and rehabilitation

The post Rehabilitation or Consolidation for Defaulted Student Loans? appeared first on The Student Loan Sherpa.