Student loans: Borrowers in default get a second chance

Not only do student loan borrowers who fell behind on their payments get President Joe Biden’s debt forgiveness, but they also get a chance to erase their delinquent status.

The Education Department’s (ED) Fresh Start program announced in April is an initiative to get default borrowers back into good standing once the pandemic payment pause expires at the end of the year.

What that means is these borrowers will again qualify for other relief programs that could help them meet their debt obligations in the future. The program also removes the default from their credit history, improving their creditworthiness.

“Before the pandemic, 7.5 million borrowers were in default and normally the rehabilitation of default loans requires at least nine on-time payments,” Mark Kantrowski, author and student loan expert, told Yahoo Money. “The pandemic forbearance payment pause applies towards the required on-time payments, helping to get default borrowers in good standing.”

Manager is holding Debt collection.
Credit: Getty Images (designer491 via Getty Images)

Default borrowers should get their loans in current status before the forbearance payment pause ends on December 31, 2022 to stop collections and wage garnishments when payments resume in January.


Additionally, borrowers in Fresh Start can move from their default loan servicer to a regular loan servicer, making them eligible for forbearance, deferment, and income driven repayment (IDR) plans, where a monthly payment of $0 counts as payment.

Default borrowers have until December 31, 2023 to apply for Fresh Start.

Here’s what else you need to know.

Two paths out of default

Borrowers have two options to get their loans in good standing.

The first path is for borrowers to return to school before Fresh Start ends on December 31, 2023. The school will then process the Fresh Start paperwork for the borrower.

Your school cannot withhold your transcripts due to your default status or any unpaid debt. The Consumer Financial Protection Bureau (CFPB) found that universities withholding transcripts when a student has an outstanding debt is a violation under the Consumer Financial Protection Act.

The second way to get out of default is for borrowers to contact the Education Department or their loan servicer to register for the program. If you don’t know who your loan service provider is, contact ED’s Default Resolution Group.

Paths out of student loan default
Paths out of student loan default under the Fresh Start Program (NASFAA)

What loans are eligible for Fresh Start?

The William D. Ford Federal Direct Loan, Perkins Loan, Federal Family Education Loan (FFEL) loans — owned by ED or commercially held — are eligible for Fresh Start, according to the Federal Student Aid (FSA) Fresh Start Fact Sheet.

Loans eligible for Fresh Start Program
Credit: U.S. Department of Education (US Dept of Education)

When will default borrowers receive notification about Fresh Start?

The Education Department is supposed to send notices to default borrowers in October. However, if you already applied for college, ED has probably already sent a notice to your school.

What are the benefits of the Fresh Start program?

The Fresh Start program helps default borrowers restore access to repayment options through IDR plans, eligibility to receive federal student aid — including Federal Pell Grants and Federal Work-Study, and protects borrowers from involuntary collection efforts and collection fees.

Additionally, it helps borrowers’ credit report by removing borrowers from the federal Credit Alert Verification Reporting System (CAIVRS).

Benefits of Fresh Start Program
Benefits of Fresh Start Program (NASFAA)

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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