Home Borrower Fresh Start student loan plan to lift 7.5 million borrowers out of default

Fresh Start student loan plan to lift 7.5 million borrowers out of default



The Biden administration has created a plan to get 7.5 million Americans in default on their federal student loans back into good standing, restoring their eligibility for financial aid and removing the incident from their credit history, according to documents obtained by the Washington Post.

Anyone now in default on a federal loan made directly by the department, Perkins loans held by the agency, and old bank debt held by the department or private companies, is eligible for the program. Their eligibility for federal Pell grants, work-study programs and loans will be restored, according to a fact sheet shared with Congress and advocacy groups this week.

The document provides the first substantial overview of how the Department of Education plans to execute the “Fresh Start” initiative announced this spring to help borrowers emerge from default, sparing them from wage garnishment , tax refunds and social security benefits.

The ministry declined to comment Tuesday. An official announcement could come later this week.

Education Undersecretary James Kvaal outlined some details of the Fresh Start program last week at an event hosted by the Student Borrower Protection Center, noting inequities in the existing default system.

“The consequences of defaulting are so punitive, it’s like whoever designed these policies is assuming that borrowers are somehow trying to beat the system,” Kvaal said. “Overall, loan defaulters are people who have been let down by lagging policies and investments in college affordability.”

While lawmakers and advocates had hoped for automatic enrollment to ensure participation in the Fresh Start initiative, borrowers must contact the department’s default resolution group or their loan holders to take full advantage of the program, according to a fact sheet. information about the initiative.

People will have a year from the end of the student loan payment break due to expire August 31 to make payment arrangements. Failure to act will put borrowers back in default and deprive them of many key benefits of the term program.

During the one-year period, all borrowers in default with eligible loans will not be subject to any collection efforts, such as garnishing their wages or garnishing tax refunds to repay their student loans, according to the information sheet.

Initiative details come two weeks ahead of pause in student loan repayments is supposed to end. More than 41 million Americans have not had to repay their federal student loans since the outbreak of the coronavirus pandemic more than two years ago. Among them are people who, before the pandemic, had not repaid their federal loans for nearly a year.

Department of Education suspends collection of delinquent student loans and repays $1.8 billion

A Government Accountability Office report released in January sounded the alarm that up to half of federal borrowers risk falling behind on their payments when the moratorium ends. Fresh Start is designed to address this risk.

Defaulting borrowers will also regain access to federal student aid. The department generally bars these borrowers from taking out new student loans, but the administration is easing the restriction to help people complete their education.

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Federal Reserve economists have found that people who had not graduated were the most likely to be behind on their student loans. Obtaining a degree could increase the likelihood of repayment, the lawyers argued. Yet providing more money to people with poor repayment histories is sure to be met with objections from moderate and conservative policymakers.

The department began notifying some colleges of the planned aid restoration late last week, according to a document reviewed by The Post and first reported by Politico.

In the fact sheet, the Department of Education said it would also delete credit reports on loans over seven years past due and remove a default rating in the Alert Verification Report system. credit. Lenders, especially those who issue government guaranteed loans, deny loans to applicants if flagged in the system.

Fresh Start aims to give a second chance to borrowers who have fallen behind on their loans more than once. The department has a student loan rehabilitation that erases a default from a person’s credit report after nine consecutive payments. A provision of the Coronavirus Aid, Relief and Economic Security Act, or Cares Act, ensured that each month of suspended payments would count towards this threshold.

The moratorium lasted more than two years, meaning borrowers have more than met the conditions of the rehabilitation program and are eligible to emerge from default.

However, the Department for Education generally requires defaulting borrowers to submit an application, a step that consumer groups say would slip people through the cracks. Proponents were also concerned that people who rehabilitated their loans in the past and defaulted again would be excluded because the program is supposed to be a one-time offer.

In April, Education Secretary Miguel Cardona agreed to waive program requirements and restrictions, ensuring people have their negative credit histories erased without losing the ability to rehabilitate their loans.


An earlier version of the story incorrectly stated which loans would be eligible for the Fresh Start initiative. Some federal loans would not qualify. The story has been corrected.