Student loans

Ministry of Education offers defaulting student borrowers a second chance

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The U.S. Department of Education is giving federal borrowers who have fallen behind on their debts a chance to get current status.

As part of his “New start” initiative, the 7.5 million student borrowers in default will be able to resume repayment without outstanding balance. The agency announced the program in April and released more information on Wednesday about how borrowers could benefit.

Borrowers currently in default will have the opportunity to improve their credit history, protect themselves from any collection activity the government may be able to undertake against them – including wage garnishment – ​​and restore their eligibility for federal student aid.

The latest guidelines don’t know exactly when borrowers can start taking steps for their fresh start, says Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers.

“There will be communications with borrowers and the Department of Education website will be updated,” Buchanan said, as to when borrowers can begin the process.

The Department of Education did not immediately respond to a request for comment.

Here’s what borrowers need to know about the new program.

Some loans are eligible, some are not

Eligibility depends on the type of loans you have and when the loans are in default.

If you have not repaid any of your loans under the Federal William D. Ford Direct Program or the Federal Family Education Loan Program, you may be eligible. Defaulted Perkins loans held by the Department of Education are also eligible.

Perkins loans in default held by a school and private student loans will not be included in the relief.

Most federal student loan payments have been on pause since March 2020, when the coronavirus pandemic has hit the United States and crippled the economy. Former President Donald Trump has extended the hiatus several times, as has President Joe Biden.

If you fail to repay your federal student loans after the payment break ends, you will miss the opportunity.

The first step: Choosing a new repayment plan

Look for changes to the credit report

As part of the Fresh Start initiative, the Ministry of Education will remove reports of loans overdue for more than seven years. It will also report all other loans in default for eligible borrowers to credit reporting agencies as “open”.

After transferring your loan to a new repairer, you may want to order a free credit report to ensure your loans are no longer marked as overdue, experts said.

Collection efforts will be temporarily suspended

The U.S. government has extraordinary collection powers over federal debts and can seize borrowers’ tax refunds, wages, and social security checks.

Through this initiative, collection activities for federal student loans in default will be suspended for one year after student loan repayments resume. Be aware that if you start fresh but fall back into default after this period, you could again be subject to collections.

Eligible borrowers can apply for new federal aid

Borrowers with eligible delinquent federal student loans can apply for federal scholarships, loans, or education funds through the free Federal Student Aid application, or FAFSA. They should be able to receive the aid even before the Fresh Start program is fully implemented later this year, according to the Ministry of Education.

“The guidance emphasizes providing borrowers with a path to graduation,” Kantrowitz said. “It will provide them with a pathway to better income, which will allow them to pay off their student loans.”

Buchanan said any defaulting borrower who wants to access federal funding to return to school can contact their school’s federal student aid office now.

Payment pause may affect schedule

The payment pause on federal student loans is currently set to expire this month, although the White House is considering extending it again.

“If the payment pause continues, borrowers in default will not make any payments, as will borrowers who are not in default,” Kantrowitz said.

And the one-year window that defaulting borrowers will be able to transfer to a new servicer does not begin until the payment break ends, he added.