Student borrowers in default can start fresh

On April 6, 2022, President Biden headed the U.S. Department of Education to extend the coronavirus-related payment suspension and 0% interest rate on certain federal student loans for four months.

The payment suspension was supposed to expire at the end of April, but it is now extended until August 31, 2022.

Fresh start for borrowers in default

The ministry also announced that it will offer borrowers whose loans are in default a “fresh start” for repayment by eliminating the impact of delinquency and default and allowing them to resume repayment in good standing.

This means that loans that are currently protected against collection during the payment break (including direct, FFEL, HEAL or Perkins loans held by defaulting department) should be removed from default status and returned to good standing at the end of the payment break. We’ll post more when we have more details from the Department, but for now we expect this relief will mean at a minimum that:

  • At the end of the break, borrowers with covered loans should not experience wage garnishment, garnishment of their tax refunds, seizure of their Social Security benefit money or collection appeals.
  • Borrowers should be able to enroll in an income-driven repayment plan to get a more affordable monthly student loan bill and to get credit to cancel any remaining debt after 20 to 25 years of repayment.
  • The default folder should be removed based on borrowers’ credit history.
  • Borrowers who were not eligible for additional financial assistance due to default should have their eligibility restoredallowing borrowers to have a second chance at higher education.

Here’s what borrowers should know about the payment suspension extension:

the Ministry of Education webpage on coronavirus relief details the terms of the suspension of payments as well as advice on how to prepare for the resumption of repayments.

Apart from the borrowers’ withdrawal from default, the terms of the payment break will remain the same. This means that the break will continue to include the following terms:

Loans covered: The relief will continue to apply only to direct loans and any other federal student loans currently held by the Department of Education, as well as any FFEL loans in default.

This means that borrowers with Federal Family Education Loans (FFEL) held by companies that are not in default and the Perkins loans held by the school will not get relief on those loans in this action. (See info here on how to determine if your loans belong to the Ministry.)

Suspension of payment: For covered loans, monthly payments will automatically be suspended until at least August 31, 2022.

This means that borrowers will not be required to make payments, although borrowers who wish to make payments during the suspension may do so.

0% temporary interest rate: For covered loans, the temporary interest rate of 0% will continue until at least August 31, 2022.

This means that no interest is charged on covered loans during the suspension and that borrowers’ balances should not increase during this period.

Suspension time counts for IDR and PSLF forgiveness: For borrowers enrolled in income-based repayment (IDR) plans, months spent in payment pause will count towards the cancellation of the IDR loan.

It is the same borrowers working on Public Service Loan Cancellation (PSLF): borrowers who otherwise meet the PSLF requirements during the suspension will receive a credit towards the forgiveness clock during the period of suspension.

Extension in time to recertify: For IDR-enrolled borrowers, previous extensions to the payment suspension included extending the annual recertification deadline until at least the end of the suspension.

This extension should work the same way: according to the ministry’s website, the first borrowers may be required to recertify in November 2022. IDR borrowers should continue to check with their loan officer and the Ministry of Education . website to determine when it is time to recertify their income.

Borrowers can recertify at any time, so those who have experienced a drop in income can recertify sooner to ensure they have an affordable repayment amount when payments resume.

No recovery on defaulted loans: During the suspension of payments, no collection activity should take place on defaulted covered loans.

That means there should be no collection calls, no wage garnishments, and no money taken from borrowers’ tax refunds or Social Security benefits to be collected on defaulted covered loans.

To access or make the most of this ongoing relief, here are some actions borrowers with federal student loans might consider taking:

Borrowers with FFEL and Perkins private loans could consider grouping into the direct lending program to be eligible for suspension of payments and suspension of interest, and other benefits granted to direct loan borrowers (for example, lower IDR payments under the revised Pay As You Earn plan).

But there are serious potential downsides to consolidation, and some borrowers aren’t eligible for consolidation, so it’s not a good idea or even an option for all borrowers.

Borrowers can learn more about consolidation pros, cons and eligibility restrictions here.

Borrowers who are not currently in an income-based repayment (IDR) plan should determine whether it makes sense to upgrade to an IDR plan so that the suspension time counts for the eventual cancellation of the IDR loan.

Borrowers who don’t want to switch to IDR might consider making voluntary payments on their student loans now, even if the payments aren’t necessary so they can continue to progress toward loan repayment and free from their debts.

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