Education Department Releases Details on “Fresh Start” Opportunity for Defaulted Federal Student Loan Borrowers

This week, the Education Department released new, comprehensive information on an initiative designed to help federal student loan borrowers who have been in default on their loans. Here are the details.

Operation Fresh Start: Helping federal student loan borrowers get out of default

For over two years, collections efforts against borrowers in default on their federal student loans have been suspended under the CARES Act. This is the same legislation that has stopped payments and frozen interest on government-held federal student loans.

President Biden expanded the CARES Act’s collections suspension to cover all defaulted federal student loans — including those not held by the government — although the payment and interest pause continues to only apply to government-held federal loans. The suspension period is currently set to end around August 30, 2023, unless the courts rule on lawsuits sooner than that.

Advocates have increasingly expressed concern that borrowers who were in default on their federal student loans prior to March 2020 — when the CARES Act went into effect — could be left in an even worse position when the suspension period ends, particularly given deteriorating economic conditions and possible changes in borrowers’ circumstances.

In response, the Biden administration announced Operation Fresh Start — an initiative designed to help federal student loan borrowers get out of default as payments resume. But up until now, details on this initiative have been extremely limited.

That changed this week, as the Education Department released a detailed roadmap.

Who qualifies for relief under Operation Fresh Start

According to the Department of Education, the following federal student loans will be eligible for relief under the Fresh Start initiative:

• Defaulted William D. Ford Federal Direct Loan (Direct Loan) Program loans
• Defaulted Federal Family Education Loan (FFEL) Program loans (both federally-held and loans held by guaranty agencies)
• Defaulted federally-held Perkins Loans

Federal student loans that defaulted after March 13, 2020, (when the CARES Act went into effect) will not be eligible for Fresh Start relief, but these loans will be automatically restored to good standing, according to the Department.

Other student loans are also not eligible for Fresh Start relief. This includes:

• Defaulted school-held Perkins Loans
• Defaulted Health Education Assistance Loan (HEAL) Program loans, which are federal student loans issued to certain healthcare workers
• Federal student loans held with the U.S. Department of Justice (DOJ) — this typically occurs when the government has initiated litigation proceedings against a defaulted borrower
• Private student loans

Benefits of the Fresh Start initiative for defaulted federal student loan borrowers

Borrowers may see multiple benefits from the Fresh Start initiative, including:

• An extended pause on all collections activity against defaulted federal student loan borrowers for one year after the CARES Act student loan pause ends and payments resume
• Restoration of their federal student loans to good standing if the borrower takes certain steps outlined below
• Ability to access federal student loan repayment programs, including income-driven repayment (IDR) plans
• Restoration of access to federal student aid for borrowers returning to school
• Credit reporting improvements, including deletion of negative credit reporting for delinquencies older than seven years, and reporting all other defaulted federal student loans as “current” and not in a collections status

How to request and obtain Fresh Start relief

Although earlier reports about Operation Fresh Start suggested the relief would be automatic, that does not appear to be the case. The Department of Education has indicated that borrowers must take affirmative steps to benefit from the initiative.

“Most borrowers with Fresh Start-eligible loans must make long-term payment arrangements with [the Education Department] or their guaranty agency,” says the Department of Education. “Similar to all borrowers when payments resume, borrowers who do not make payment arrangements during the Fresh Start initiative will again be subject to default collections one year after the payment pause ends.”

The Department indicates that “any borrower with eligible defaulted federal student loans can make payment arrangements during the initiative by visiting myeddebt.ed.gov, contacting their loan holder by phone or in writing, or calling the Default Resolution Group at 1-800-621-3115.” No other details have been provided by the Department.

Borrowers who make appropriate payment arrangements will be transferred to a non-default federal loan servicer, says the Department. At that point, borrowers should be able to access any number of available repayment plan options, including income-driven repayment plans.

What happens if you don’t request Fresh Start relief?

Borrowers who are in default on their federal student loans but don’t request Fresh Start relief would still be shielded from collections efforts for one year following the resumption of federal student loan payments.

But borrowers who do not take action during that timeframe would remain in default and could then be subjected to collections activity after the one-year grace period ends.

“Borrowers who do not take advantage of this option or pay off their federal student loans during the Fresh Start initiative period will again be subject to default collections one year after the pause ends,” says the Department. “In addition, borrowers will lose eligibility for federal student aid, and [the Education Department] and guaranty agencies will resume reporting their loans as being in collections to credit reporting agencies.”

Adverse collections activity can include administrative wage garnishment, interceptions of tax refunds, and offsets of federal benefits, including Social Security. The government can also file a suit against borrowers in federal court to pursue other income or assets.