This article is reprinted by permission from NerdWallet. About 7.5 million student loan borrowers with loans in default are set to get a fresh start — a chance to enter repayment in “good standing” — but only if they opt in.
Borrowers have until one year after the current payment pause expires — currently scheduled for Aug. 31, but expected to be extended — to enroll in the “Fresh Start” program and arrange to make payments, according to the Department of Education. During that year they won’t face collection costs or other punitive consequences of default, such as wage garnishment. But if they don’t act before the one-year limit is up, their loans will remain in default. The program was announced April 17 as part of the sixth extension of the federal student loan payment pause that first began in March 2020. But it took four months for details to emerge. Student loans are delinquent when they’re 30 days past due, and they default when the borrower hasn’t made a payment for 270 days. Once that happens, federal aid for school is cut off and collections efforts begin, including wage garnishment or seizure of tax refunds. Damage to credit history is extensive: nine months of late payments, plus a default, make it more difficult for borrowers to qualify for credit cards, mortgages or auto loans. Federal loans are not easily discharged in bankruptcy courts, and there’s no statute of limitations on collections efforts. Also read: Department of Education canceling $3.9 billion in debt for 208,000 scammed students — here’s who qualifiesWho should seek a Fresh Start? The Fresh Start program addresses most of the consequences of default by removing the penalties and making the rehabilitation process cheap and easy. The catch? You may have to make payments moving forward. The program won’t be automatic, but there’s no downside to it, says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors. “For those who say, ‘I can’t afford to pay it,’ you might be able to if it’s out of default because you’ll have access to lower payment options,” Mayotte says. “You’ll be able to potentially …