‘Fresh Start’: What Student Loan Borrowers in Default Need to Know

by Ann deBruyn

When payments resume on federal student loans, borrowers with loans previously in default will receive a fresh start and be allowed to reenter repayment in good standing.

But what does that entail for borrowers in default? And how does the U.S. Department of Education plan to support borrowers to prevent them from defaulting again?

Few details are currently available about the program, informally labeled Operation Fresh Start, that was announced on April 6 as part of the federal student loan payment pause extension to Aug. 31. However, the Education Department has since indicated more details about the proposal will be available in the coming weeks.

Rumors of a fresh-start plan had begun swirling in October 2021 after the website Politico obtained internal documents from the Education Department outlining an intention to lift borrowers in default back into good standing when payments resumed. A borrower in default endures long-lasting damage to credit history. In addition, they can’t receive other federal aid to return to school and face wage garnishment or seizure of tax refunds and bills for collection costs.

Here’s what we know so far:

7.5 million borrowers to get a fresh start

The fresh start is automatic and applies only to borrowers with federal student loans, including direct loans and government-held Federal Family Education Loan debt. It’s unclear if the relief would apply to privately-held FFEL loans. As of March 31, approximately 7.5 million borrowers have loans in default, according to federal data. This amount includes defaulted loans held by the Education Department and defaulted loans held by guaranty agencies.

The fresh start will be reflected on credit reports

The negative mark of default on borrowers’ credit reports will be removed as part of the fresh start, according to the Education Department. It’s unclear how long it will take for your report to reflect the default erasure.

All collections activities through the Treasury Offset Program on federal student loans in default are suspended until after the payment pause ends. These include wage garnishment , seized tax refunds and collection costs.

Access to repayment options and forgiveness is restored

According to the April findings of a New York Federal Reserve survey, borrowers enrolled in an income-driven repayment plan are less likely to have difficulty repaying their debt. Payments under an income-driven plan can be as low as $0.

However, according to the Education Department, all months spent in default, including during the pause, do not count toward PSLF or income-driven repayment forgiveness under current federal regulations.

New defaults won’t happen until 2023

Default happens after 270 days without a payment — roughly nine months. So, for example, if payments restart in September, as scheduled, then the first defaults wouldn’t occur until around May 2023.

If a borrower re-defaults, their most likely way out is through rehabilitation, which requires the borrower to make nine payments — of an agreed-upon “affordable” payment amount — within 10 consecutive months. Data from the Education Department shows some borrowers took advantage of that: 602,000 of them rehabilitated their loans in 2020 and 2021, according to the department.

The borrowers most likely to struggle with loan payments when they resume are lower-income, less educated, non-white, female, middle-aged borrowers, and those not enrolled in income-driven repayment plans, according to the same New York Federal Reserve survey.

It is unclear how the Education Department plans to prevent re-defaults. It’s also unclear how the department plans to reach all borrowers who had loans in default before the pause. In January, a Government Accountability Office report found that 25% of borrowers in default do not have an email address on record with the Education Department.

How to find additional student loan help

Legit student loan help organizations won't call, text or email borrowers with offers of debt resolution. Avoid “debt relief” companies that promise immediate student loan forgiveness. If it sounds too good to be true, it usually is.

Here are some vetted student loan help resources to consider for information, advice or both; they are established organizations with verified histories:

Many of these organizations offer advice for free. However, you may need to pay a fee, such as with a certified nonprofit credit counseling agency or to hire an attorney.