The document provides the first comprehensive overview of how the Department of Education plans to implement the “Reset” initiative announced this spring to help borrowers recover from default and save them from garnishing wages, tax refunds and Social Security benefits.
The department declined to comment Tuesday. An official announcement could be made later this week.
Secretary of State for Education James Kvaal previewed some details of the Fresh Start program at an event hosted by the Student Borrower Protection Center last week and noted inequities in the existing standard system.
“The consequences of default are so punitive that it seems the writer of these guidelines assumed that borrowers were somehow trying to beat the system,” Kvaal said. “By and large, borrowers who default on their loans are people who failed because of politics and delayed investments in college affordability.”
While lawmakers and advocates had hoped for automatic enrollment to guarantee participation in the Fresh Start initiative, borrowers must contact the department’s Default Resolution Group or their borrowers to take full advantage of the program, a fact sheet said about the initiative.
People have one year from the end of the student loan payment break — expires on August 31st — to make payment arrangements. If they don’t act, borrowers will default again and be denied many important benefits of the temporary scheme.
During the one-year period, all defaulting borrowers with eligible loans will not be subject to collection actions such as B. garnishment of wages or tax refunds to repay their student loans, according to the leaflet.
Details of the initiative come two weeks before a pause in student loan payments shall end. More than 41 million Americans have not had to make payments on their government student loans since the outbreak of the coronavirus pandemic more than two years ago. Among them are people who had not made payments on their federal loans for nearly a year prior to the pandemic.
Department of Education halts collection of defaulted student loans and refunds $1.8 billion
A report by the Government Accountability Office in January was alarming that up to half of federal student loan borrowers were at risk of defaulting on their payments when the moratorium ends. Fresh Start was designed to address this risk.
Defaulted borrowers will also regain access to government student aid. The department usually prohibits such borrowers from taking out new student loans, but the administration is relaxing the restriction to help people complete their education.
Who Has Student Loan Debt in America?
That’s what Federal Reserve economists found out People who did not complete college were the most likely to be behind on their student loans. Completing a degree could increase the likelihood of a payback, advocates argue. Still, making more money available to people with bad repayment records is sure to draw objections from moderate and conservative politicians.
The department began notifying some colleges of plans to restore aid late last week, according to a document reviewed by The Post and first reported by Politico.
In the leaflet, the Department of Education said it would also delete credit reports on loans more than seven years past due and remove a standard notation in the credit check reporting system. Lenders, particularly those providing government-backed loans, will deny loans to applicants if they are flagged in the system.
Fresh Start is rooted in giving a second chance to borrowers who have defaulted on their loans more than once. The department has a student loan rehabilitation measure that erases a default from a person’s credit report after nine consecutive payments. A provision in the Coronavirus Aid, Relief and Economic Security Act or Cares Act ensured that each month of suspended payments counts towards this threshold.
The moratorium has lasted more than two years, meaning borrowers have more than met the conditions of the rehabilitation program and are eligible to end the default.
But the Department of Education typically requires defaulting borrowers to file an application, a move consumer groups said would result in people slipping through the cracks. Advocates also feared people who had rehabilitated their loans and defaulted again in the past would be left out because the program is meant to be a one-time offer.
In April, Education Secretary Miguel Cardona agreed to waive the program’s requirements and restrictions and ensure people get their negative credit histories cleaned up without losing the ability to rehabilitate their credit.
An earlier version of the story incorrectly stated which loans would be eligible for the Fresh Start initiative. Some federal loans would not qualify. The story has been corrected.