When the Biden Administration announced another extension to the federal student loan payment pause and interest waiver in April, it mentioned a “fresh start” program to provide delinquent and defaulted borrowers with a clean slate.
Financial Relief for Federal Student Loan Borrowers
The payment pause and interest waiver, also known as the student loan moratorium, suspended repayment on federal education loans held by or on behalf of the U.S. Department of Education starting in March 2020.
The interest rate was also temporarily set to zero, so no new interest is accruing on these loans.
Collection activity on defaulted federal student loans was also suspended. This includes administrative wage garnishment, offset of income tax refunds and offset of Social Security disability and retirement benefit payments on defaulted loans.
The payment pause and interest waiver has been extended a total of eight times, twice during the Trump Administration and six times during the Biden Administration. The most recent extension will expire in 2023.
What Is the Fresh Start Program?
Under the Fresh Start Program, borrowers whose federal student loans were delinquent or in default prior to the pandemic will be returned to a “Current” status when the payment pause ends. The delinquencies and defaults will be removed from their credit history.
The Fresh Start Program will also end wage garnishment, income tax refund offset and the offset of Social Security benefit payments on eligible loans.
Removing student loan delinquency and default from a borrower’s credit history will yield a big boost to the borrower’s credit scores. This will help these borrowers qualify for new credit and reduce the interest rates they pay on other debt, such as credit cards, auto loans and mortgages.
Eligible borrowers include all borrowers whose loans were eligible for the payment pause and interest waiver. This includes defaulted William D. Ford Federal Direct Loan (Direct Loan) Program loans, Federal Family Education Loan (FFEL) Program loans (both ED-held and commercial-held), and ED-held Perkins loans. Commercial-held FFEL Program loans that defaulted after March 13, 2020, will be returned to current standing, which means they will not be eligible for the Fresh Start benefits. Review this fact sheet from the U.S. Department of Education to learn more about how eligibility is determined.
About 10 million borrowers will benefit from the Fresh Start Program, including more than 7 million borrowers whose loans were in default and about 3 million borrowers whose loans were delinquent.
Borrowers must switch into a repayment plan and begin making payments on their loans within one year, or their loans will return to a default status. A calculated payment of zero on an income-driven repayment plan will count as making a payment.
About a month after the restart of repayment, get a free copy of your credit reports from annualcreditreport.com to confirm that the delinquencies and defaults have been removed from your credit history.
Beware of Misinformation
Scammers may try to take advantage of desperate borrowers. Do not share your FSA ID with anybody. Do not pay a fee to anybody who claims they can help you with the fresh start program. The fresh start program is a free program, so you will not need to pay a fee to participate.
You can get more information from the StudentAid.gov website, from your student loan servicer, or by calling the U.S. Department of Education’s toll-free hotline at 1-800-4-FED-AID (1-800-433-3243). To confirm if your loans qualify, contact the Default Resolution Group at 1-800-621-3115.
The U.S. Department of Education will notify eligible borrowers directly, so make sure your contact information is up to date with the loan servicer and on StudentAid.gov. They will also communicate the benefits of the program to qualified borrowers via email, postal mail, and social media.
How to Avoid Defaulting Again on Your Federal Student Loans
But borrowers should take steps to avoid defaulting again on their federal student loans.
- Sign up for AutoPay, which automatically transfers the monthly loan payment from your bank account to the loan servicer. Not only will this reduce the chances of being late with a payment, but the lender will reduce your interest rate by a quarter of a percentage point (0.25%), saving you money.
- If you are struggling to make your student loan payments, consider using the economic hardship deferment, unemployment deferment or a general forbearance to continue a payment pause. Interest may accrue during a deferment or forbearance, increasing the amount of debt, but it is better than defaulting on your student loans. If you’ve already exhausted your deferments and forbearances, consider consolidating your loans into a Federal Direct Consolidation Loan. The consolidation loan is a new loan and thus eligible for a new set of deferments and forbearances.
- Switch into an income-driven repayment plan, like IBR, PAYE and REPAYE. These repayment plans base the loan payments on a percentage of discretionary income instead of the amount of debt. If your income is less than 150% of the poverty line, the monthly loan payment will be zero.
Options If You Aren’t Eligible for Fresh Start
Private student loans are not eligible for the Fresh Start Program. Borrowers who are delinquent on FFEL loans that were made in 2007-08 and before are not eligible unless they consolidate them into the Direct Loan program before the end of the payment pause and interest waiver. Borrowers who default on FFEL loans that were made in 2007-08 and before will be turned over to a Guaranty Agency, who will then pay the default claim on behalf of the U.S. Department of Education.
If you’re still struggling to make payments, reach out to your servicer immediately to chat through your financial situation and your potential options.
