Fresh Start Initiative: A Second Chance for Borrowers with Defaulted Federal Student Loans

Updated on June 26, 2023

Discover the benefits of the “Fresh Start” initiative for borrowers with defaulted federal student loans. Learn about loan rehabilitation, credit report improvements, access to federal aid, flexible repayment plans, and more.

Questions Answered in this Article

1. What is the Fresh Start program for federal student loans? The Fresh Start program is an initiative designed to help borrowers with federal student loans who were previously in default. It allows them to re-enter repayment in good standing by offering benefits such as returning loans to “current” status on credit reports, removing negative default marks on credit reports, providing access to federal student aid and other government loans, offering flexible repayment plans like income-driven repayment, and granting short-term relief options like deferment or forbearance.

2. Who is eligible for the Fresh Start program? The Fresh Start program is available to borrowers with federal student loans, including direct loans, government-held Perkins loans, government-held FFELP loans, and privately held FFELP loans. Eligible borrowers must have defaulted on their loans before the forbearance period began on March 13, 2020. Private student loans, school-held Perkins Loans, Health Education Assistance Loan Program loans, loans under the purview of the U.S. Department of Justice, and loans that default after the student loan payment pause and pause on collections are not eligible.

3. How can borrowers participate in the Fresh Start program? Borrowers can opt into the Fresh Start program to keep the benefits after the program expires. They should sign up for Fresh Start before student loan payments resume in October 2023. To get started, borrowers must make payment arrangements with the Department of Education’s Default Resolution Group or the guaranty agency holding their FFELP loans. Enrollment can be done online, by phone, or by mail, depending on the borrower’s situation. It is important to enroll by September 2024 to receive the full benefits.

4. What are the benefits of participating in the Fresh Start program? Participating in the Fresh Start program offers several benefits. Borrowers can access federal student aid and other government loans, including work-study and Pell Grants. Collection efforts on defaulted loans, such as wage garnishment and seized tax refunds, are suspended until the Fresh Start program ends. Borrowers who previously rehabilitated their loans and defaulted again can use Fresh Start to rehabilitate their loans once more. Additionally, the program provides access to repayment options, forgiveness programs, and short-term relief measures for borrowers facing financial hardship.

5. What happens if borrowers do not enroll in the Fresh Start program? Borrowers who do not enroll in the Fresh Start program will lose all the benefits once the program ends. They will not have their loans returned to “current” status on credit reports, and negative default marks will remain. Collection efforts and credit reporting will resume, potentially leading to further financial difficulties. Eligible borrowers must enroll in Fresh Start to take advantage of the benefits and improve their loan repayment status.

About the Fresh Start Program

With federal student loan bills resuming in October 2023, borrowers who have defaulted on their loans can now re-enter repayment in good standing through the “Fresh Start” initiative. This program aims to relieve borrowers who defaulted on their federal student loans before the pandemic. By participating in Fresh Start, borrowers can enjoy various benefits, including removing negative default marks on their credit reports, access to federal student aid and other government loans, flexible repayment plans, and short-term relief options like deferment or forbearance. Borrowers must enroll in the Fresh Start program by September 2024 to take full advantage of the benefits.

^{More: Supreme Court Ruling and Resuming Student Loan Payments: What Students Need to Know for September}

Qualification for the Fresh Start Program

Approximately 7.5 million borrowers with federal student loans in default may qualify for the Fresh Start program, according to federal data. This includes defaulted loans held by the Education Department and Federal Family Education Loan Program (FFELP) loans held by guaranty agencies. The program is available for borrowers with various federal student loans, including direct loans, government-held Perkins loans, government-held FFELP loans, and privately held FFELP loans. To be eligible, borrowers must have defaulted on their loans before the forbearance period began on March 13, 2020. However, certain types of loans, such as private student loans, school-held Perkins Loans, Health Education Assistance Loan Program loans, loans under the purview of the U.S. Department of Justice, and direct loans and commercially held FFELP loans that default after the end of the student loan payment pause and the pause on collections, are not eligible for the program.

^{More: College Students Facing Higher Federal Student Loan Interest Rates in 2023-24}

^{More: Department of Education Announces Changes to Income-Driven Repayment Forgiveness Criteria}

How to Enroll in Fresh Start

While some benefits are automatically available, borrowers must opt into the Fresh Start program to retain them after it expires. Signing up for Fresh Start as soon as possible is recommended instead of waiting until student loan payments resume in October. Borrowers have one year to enroll in Fresh Start once the forbearance period ends, but applying promptly when the system opens is advisable. The government may reach out to eligible borrowers to inform them about the program, but it is not guaranteed. Therefore, borrowers should ensure their contact information is current to avoid missing important notifications. To initiate the Fresh Start process, borrowers must make payment arrangements with the Department of Education’s Default Resolution Group or the guaranty agency holding their FFELP loans. Once a long-term payment plan is established, loans will be transferred to a new loan servicer, and default marks will be removed from the borrower’s credit report. Borrowers with defaulted loans held by the Education Department can submit a Fresh Start request online, by phone, or by mail.

^{Learn More: An Overview of Student Loan Forgiveness Programs: Benefits, Drawbacks, and Options for Struggling Borrowers}

Benefits Available without Enrolling

Fresh Start offers certain benefits that do not require enrollment. Schools are advised to grant borrowers in default access to federal student aid, which includes federal loans, work-study, and Pell Grants. This access to federal assistance can be crucial for borrowers who want to return to school and complete their degree programs. Additionally, borrowers who go through Fresh Start regain eligibility for other government-backed loans, such as mortgages. The Fresh Start initiative also suspends all collections activities on defaulted federal student loans until the program ends, including wage garnishment, tax refund seizures, collection calls, and more.

Additional Benefits Available after Enrolling

After enrolling in Fresh Start, borrowers can expect further benefits. In the months ahead, the Education Department plans to report defaulted student loans as “current” instead of “in collections” to credit bureaus, which can positively impact borrowers’ credit reports. Fresh Start removes default marks from credit reports after borrowers make payment arrangements and transfer their loans to a new servicer. This process may take some time, and borrowers should monitor their credit reports to ensure the updates are reflected accurately.

^{More: Understanding Biden’s Efforts to Alleviate Student Loan Debt in the US}

Fresh Start also includes the removal of the “default” flag from the Credit Alert Interactive Voice Response System (CAIVRS), a federal database of delinquent debtors. Furthermore, any loans that have been delinquent for more than seven years will be removed from borrowers’ credit reports. Importantly, suppose a borrower defaults again after participating in Fresh Start. In that case, the loan’s original delinquency date will be used, ensuring that a new default does not reset the seven-year timeline for appearing on a credit report.

Re-entering good standing through Fresh Start opens access to various repayment options and forgiveness programs. Borrowers can enroll in income-driven repayment plans, significantly reducing monthly payments based on income levels or job loss. This flexibility can make loan repayment more manageable and prevent future defaults. Additionally, borrowers who meet the requirements can work towards Public Service Loan Forgiveness (PSLF), which offers loan forgiveness after certain qualifying payments while working in a qualifying public service job.

^{More: Public Service Loan Forgiveness (PSLF) Program – A Guide}

Furthermore, Fresh Start reinstates access to short-term relief options. Borrowers who have defaulted on their federal student loans are typically unable to request temporary payment forbearance or deferment. However, by participating in Fresh Start, borrowers are lifted from default and regain eligibility for these financial hardship relief measures.

It is essential to note that with the resumption of student loan payments in October 2023, new defaults may occur as early as June 2024. Borrowers who consent to exit bankruptcy but the default will have the opportunity to rehabilitate their loans once more through the Fresh Start initiative.

^{More: Managing Student Loan Debt: Understanding Your Options}

If borrowers require additional assistance regarding their student loans, seeking help from reputable organizations is crucial. Legitimate student loans help resources, such as The Institute of Student Loan Advisors, the National Consumer Law Center, the Student Borrower Protection Center, and the National Foundation for Credit Counseling, can provide valuable information, advice, and assistance with repayment plans , forgiveness programs, and dispute resolution. Avoiding “debt relief” companies that make promises of immediate student loan forgiveness is crucial, as these often become scams.

In conclusion, the Fresh Start initiative offers a second chance for borrowers with defaulted federal student loans. By enrolling in the program, borrowers can regain good standing, benefit from improved credit reports, access repayment options, and forgiveness programs, and enjoy short-term relief measures. Taking advantage of the Fresh Start initiative can provide borrowers with the necessary support and resources to manage their student loans successfully.

_{More: Student Loan Forgiveness and Relief Options for 2022}

^{Learn More: How Income-Driven Repayment Plans Can Help You Manage Your Student Loan Payments}

Summary

The Fresh Start initiative allows borrowers with federal student loans previously in default to re-enter repayment in good standing.
The Fresh Start program benefits include loans being returned to “current” status on credit reports and removing negative default marks.
Eligible borrowers gain access to federal student aid, government loans (like mortgages), flexible repayment plans (such as income-driven repayment), and short-term relief options (like deferment or forbearance).
Collection efforts on defaulted loans are suspended even after the student loan payment pause ends.
Some benefits are available automatically, but borrowers must enroll in the Fresh Start program and agree to enter a repayment plan for others.
Approximately 7.5 million borrowers with federal student loans in default could qualify for the Fresh Start program.
The program is accessible to borrowers with certain types of federal student loans, excluding private loans and loans under the purview of the U.S. Department of Justice.
Borrowers must enroll in the Fresh Start program by September 2024 to receive the full benefits.
The Fresh Start program allows borrowers to regain access to federal student aid and other government loans.
Borrowers who have rehabilitated their loans in the past and defaulted again can use Fresh Start to rehabilitate their loans once more.
The Fresh Start program will remove the default status from credit reports and provide access to repayment options and forgiveness programs.
Short-term relief options will be available again for borrowers who opt into the Fresh Start program.
Borrowers need to take action and sign up for Fresh Start before student loan payments resume in October 2023.
Eligible borrowers can enroll online, by phone, or by mail to participate in the Fresh Start program.
Borrowers who do not enroll in Fresh Start will lose all the program’s benefits once it ends.
Various organizations and resources are available to provide information and assistance to borrowers seeking student loan help.

Definition of Terms

Fresh Start: Refers to the initiative aimed at helping borrowers with federal student loans previously in default to re-enter repayment in good standing.
Defaulted Loans: Loans on which borrowers have failed to make payments for an extended period, typically 270 days for federal student loans, resulting in default status.
Federal Student Aid: Financial assistance provided by the U.S. federal government to help students pay for their education, including grants, work-study programs, and loans.
Credit Report: A detailed record of an individual’s credit history, including loan repayment information, credit card usage, and other financial activities. Lenders and institutions use credit reports to assess a borrower’s creditworthiness.
Income-Driven Repayment: A repayment plan for federal student loans where the monthly payments are based on the borrower’s income and family size. It provides more affordable payment options for borrowers with lower incomes.
Deferment: A temporary suspension of loan payments allowed under specific circumstances, such as enrollment in school, military service, or economic hardship. Interest may continue to accrue during deferment.
Forbearance: A temporary period during which loan payments are reduced or paused. Forbearance is typically granted in cases of financial hardship but interest may continue to accrue.
Loan Servicer: An organization or company responsible for managing and collecting loan payments on behalf of the lender. Loan servicers communicate with borrowers, process payments, and provide customer service.
Rehabilitation: A process to bring a defaulted loan back into good standing by making a series of agreed-upon payments. Successful rehabilitation removes the default status and its negative effects.
Public Service Loan Forgiveness (PSLF): A program that forgives the remaining balance on eligible federal student loans after the borrower has made 120 qualifying monthly payments while working full-time for a qualifying employer, such as a government or nonprofit organization.
Credit Bureaus: Companies that collect and maintain consumer credit information and generate credit reports. Common credit bureaus include Equifax, Experian, and TransUnion.
Treasury Offset Program: A program that allows the federal government to collect outstanding debts, including defaulted federal student loans, by offsetting tax refunds, Social Security payments, and other federal payments.