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The U.S. Department of Education is giving their federal student loans who are already in debt a chance to get where they are now.
Be part of it”A new start” Under the initiative, student loans of 7.5 million students who are in default will be able to return to repay their loans with no overdue balances. The agency announced the program in April, and on Wednesday released more information on how borrowers can benefit.
Borrowers who are currently in default will have the opportunity to improve their credit profile, protecting themselves from any collection action the government may take against them – including pay cuts – and restore eligibility for federal student aid.
Scott Buchanan, executive director of Student Loan Servicing Alliance, a trade group for federal student loan service providers, said:
“There will be borrower contact information and the Department of Education website will be updated,” said Buchanan, 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.
Eligibility depends on the type of loan you have and when those loans default.
If you default on any loan under the William D. Ford Federal Direct Program or the Federal Family Education Loan Program, you are likely eligible. Default Perkins loans organized by the Department of Education are also eligible.
Insolvent Perkins loans held by a school and private student loans will not be included in the relief.
Most federal student loan payments have been paused since March 2020, when coronavirus pandemic hit the US and crippled the economy. Former President Donald Trump has extended his leave several times, as has the President Joe Biden.
If you default on your federal student loans after the payment pause ends, you’re missing out.
Under the New Start initiative, the Department of Education will remove reports of loans that are past due for more than seven years. It will also report all other defaults for borrowers who qualify for credit reporting agencies as “current”.
After you get your loan transferred to a new servicer, you may want to place an order a free credit report to make sure your loans are no longer marked as delinquent, experts say.
The U.S. government has extraordinary collection powers on federal debt, and it can seize borrowers’ tax refunds, wages, and Social Security checks.
Thanks to this initiative, collection of federally insolvent student loans will be suspended for one year after student loan payments resume. Be aware that if you start over but then fall back to the default state after that time period, you may be subject to collection again.
Borrowers with federal student loan defaults qualify may apply for federal student grants, loans or work-study funds through the Free Application for Federal Student Aid, or FAFSA. According to the Department of Education, they will be able to receive aid even before the Fresh Start program is fully implemented later this year.
“This guide emphasizes providing borrowers with a pathway to completing their degree,” says Kantrowitz. “This will give them a pathway to a better income so they can pay off their student loans.”
Buchanan said any defaulted borrower looking to access federal funding to return to school can contact their school’s federal student aid office now.
The payment pause on federal student loans is currently scheduled to expire this month, although the White House is considering extending it again.
“If the payment pause is continued, default borrowers will not make any payments, just like borrowers who are not in default,” Kantrowitz said.
And the one-year period in which default borrowers will be switched to a new service provider only begins when the payment pause ends, he added.