Written By Conor Mahlmann, CSLP®, CFP®
Millions of borrowers are in a better position due to the pause on payments and accrued interest during the COVID emergency. However, for the first few years of paused payments, there wasn’t a relief program for borrowers who were in default before the pandemic began.
In April 2022, the Department of Education rolled out the Fresh Start program to do exactly that, but it offered very little guidance on how to take advantage of it.
With roughly 5% of student loans in default status, according to Education Data, the Fresh Start program is expected to impact just short of 8 million borrowers.
What is the Fresh Start program?
Operation Fresh Start is an initiative that allows for the removal of the defaulted status on borrowers’ federal student loans. It also lets eligible borrowers access benefits, such as:
- Stopped collections and garnishments.
- Reinstated eligibility for future student loans.
- Access to income-driven repayment and forgiveness plans.
There’s no question that the Department of Education wants to get as many borrowers out of default as possible, so borrowers can use the New REPAYE income-driven plan when it’s released later this year.
Under the New REPAYE plan, borrowers who are having trouble paying their loans could get a very low (or even $0) monthly payment. Additionally, they’ll start accruing time eligibility toward having their loans forgiven.
The Department of Education clarified that, as of December 2022, federal student loans that were previously in default are now reported to credit reporting agencies as “current.” For borrowers whose loans were transferred to a default servicer or a guaranty agency, their loan’s default status was removed from their credit report a bit later in February 2023.
If you had defaulted loans, you might have already seen a meaningful bump in your credit score from this!
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Fresh Start program eligibility
The only eligibility requirement for Fresh Start is having federal student loans that went into default either before, or during, the COVID emergency. If you go into default after payments resume later this year, the Fresh Start program would not apply. There are, however, a few loan types that don’t qualify for the program.
- Federal Family Education Loans (FFELs): If you have FFELs, you can take full advantage of the program. If you have commercially managed FFELs, it’s still unclear as to whether you’ll qualify. Taking further steps to find out is still in your best interest.
- Perkins Loans: If you have Perkins Loans that are held by the Department of Education, you can also qualify for the program. Perkins Loans that individual schools hold, however, are not eligible. You would know if you had an institution-held Perkins loan because the school you attended would also be your loan servicer.
- Health Education Assistance Loan (HEAL): Currently, HEAL program loans also do not qualify.
How to use the Fresh Start program [updated process]
The Department of Education recently updated the process to take advantage of the Fresh Start program. Go online to myeddebt.ed.gov and log in to your account to request to use the Fresh Start program. Keep in mind this is a separate login from StudentAid.gov, and you may need to create an account first.
Alternatively, you can call the Department of Education’s default resolution group at 1-800-621-3115, and they can help you sign up for Fresh Start. While on the phone, they will also allow you to sign up for an income-driven payment plan if you’d like. To be fully prepared, have your most recently filed taxes handy so you can relay your income details.
Once your loans are removed from default, they might move from a default servicer to a loan servicer, such as Nelnet, AidVantage, MOHELA, or Edfinancial.
Keep an eye out for communications from any of these companies on how to access your loan portal once you’ve signed up for the Fresh Start program.
How to maximize the benefit of getting out of default
The Fresh Start program provides the enormous benefit of being able to skip the normally time-consuming process of getting your federal student loans out of default. If you have defaulted loans that qualify for the program, take advantage of this program right away.
Once the default is removed from your loans and they are moved to a loan servicer, they’ll remain under the COVID payment pause until payments resume later this year.
They’ll also qualify for the IDR waiver, which the Department of Education is implementing early next year. The IDR waiver might boost the amount of credit you have toward various forgiveness programs. Then, once payments resume, you can make income-driven payments and work toward finishing the 20- or 25-year requirement for income-driven forgiveness.
This isn’t always the right plan for everyone. If your income has substantially increased over the past several years, your income-driven payments might be quite expensive and end up costing you money in the long run.
If you’d like to work with an expert to figure out which route makes the most sense for your situation, schedule a consultation with us. We’ll work with you to put together a comprehensive plan for your loan repayment.
