The Biden administration has issued a last-minute extension of a program offering federal student loan borrowers in default a chance to regain good standing, but they must act fast to be included.
A loan is considered in default after 270 days of missed payments, at which point borrowers lose access to further federal student aid such as grants, loans, and work-study opportunities.
Launched as a one-time offering in 2022, the “Fresh Start” program allows borrowers with eligible defaulted loans to apply for federal student aid, such as Pell Grants, so that they may complete their degrees. It also lets enrollees return their loans to active repayment status, which can improve their credit scores and stop involuntary debt collection.
Almost 80 percent of borrowers enrolling in Fresh Start opt for an income-driven repayment (IDR) plan once they get out of default, according to the Education Department. An IDR plan adjusts monthly payments based on the borrowers’ income and family size, and can potentially reduce monthly payments to as low as $0.
“You will never pay more than 10 to 20 percent of your discretionary income,” the Education Department states on its website. “Half of borrowers on Fresh Start are paying $0 a month, and 60 percent of Fresh Start borrowers are paying less than $50 a month.”
By using Fresh Start, borrowers can also get the record of default removed from their credit report, a feature that could be critical to student loan borrowers whose credit scores are no longer shielded by the now-expired “on-ramp” period.
In June 2023, the Education Department announced the one-year transition period to help borrowers gradually return to paying their monthly bills as the pandemic-era repayment pause ended. The theory was that borrowers who had long been out of the habit of making payments would need more time to adjust their behavior.
During the on-ramp, payments were due and interest accrued once again, but missed payments weren’t considered delinquent, placed in default, or reported as such to creditors or debt collectors.
The grace period ran from Oct. 1, 2023, through Sept. 30, 2024, after which borrowers once again face typical consequences of missed payments, including going into default. Defaulting on a loan can damage one’s credit score and may result in the federal government garnishing wages, seizing tax returns, and intercepting Social Security benefits.
The on-ramp expires as the Biden administration’s signature IDR plan remains in legal limbo.
Two groups of Republican state attorneys general challenged SAVE in two federal district courts. They argued that the Biden administration lacks the authority to implement the plan and that it contradicts the U.S. Supreme Court’s decision last summer, which struck down an earlier attempt at large-scale student loan cancellation.
This is not a final ruling, and both cases could return to the high court once the federal appeals courts rule on the dispute’s merits.
