The Biden administration has introduced several programs to help make student loans more affordable, as well as to create a clearer path to loan forgiveness for millions of federal student loan borrowers. For example, the SAVE Plan will reduce monthly loan payments for millions of people, and the "on-ramp" to repayment will make it easier for many borrowers to gradually resume loan repayment.
However, none of this helps student loan borrowers currently in default. According to the Education Data Initiative, about 5% of all student loan debt is in default, which means that the number is likely in the millions, since there are more than 43 million federal student loan borrowers.
For this group, the Department of Education is offering a one-time opportunity to get out of default and get back on track for good.
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The Fresh Start program
As the name suggests, the Fresh Start program is designed to provide, well, a fresh start for borrowers whose federal student loans are currently in default.
Borrowers who sign up for fresh start will have their loans transferred back to a student loan servicer and will have access to their account restored. Defaulted loans will be officially returned to an "in repayment" status, which means that borrowers can enroll in the repayment plan of their choice. And one of the best benefits of all is that the record of the student loan default will be removed from the borrower's credit report.
How to stay on track
Of course, having federal student loans removed from default is a big step in the right direction, and borrowers who are in this category should act as soon as possible to take advantage by contacting the agency that holds their loans. After all, Fresh Start is a temporary program, and it's unclear how long it will last.
However, getting out of default is one thing. Staying out of default is the real goal. And there are a few ways borrowers who use Fresh Start can set themselves up for success.
For one thing, borrowers can sign up for an income-driven repayment (IDR) plan, such as the newly introduced SAVE Plan. This limits your required student loan payments to a certain percentage of your discretionary income, and unless your income exceeds 225% of the federal poverty level for your family size, you won't be required to make any payments at all. For context, a family of four with household income less than $67,500 would have $0 student loan payments – and the loan would be treated as if you're fulfilling your repayment requirement.
In addition, borrowers who are enrolled in income-driven repayment will be on track to eventually have their loans forgiven. The SAVE Plan forgives any remaining balance after 20 years in repayment, and any time you've previously spent in repayment (and many periods of deferment or forbearance) will count toward the total. You may also qualify for Public Service Loan Forgiveness if you work in certain types of employment, which cuts the forgiveness timetable to just 10 years. And this applies even if your required payment is $0.
The bottom line is that if you have federal student loans in default, taking advantage of the Fresh Start program could be a very smart move. But it's a temporary program, so act soon.
