College borrowers get a ‘fresh start’

Federal student loan repayments were first suspended in March 2020 during the Trump administration, when the pandemic was shutting down the country and people were losing their jobs.

The loan repayment moratorium continued under the Biden administration, and the policy is now in its sixth extension, set to end on August 31, 2022. With the midterm elections coming up in November, however , I wouldn’t be surprised if it was extended again.

The pause was a boon for many borrowers who not only skipped payments but also saw their balances stay the same. During this period, the interest rate was fixed at 0%.

The pause also benefited borrowers who defaulted on student loans, as collection activity was suspended.

But another major development, which has received little publicity, will significantly help borrowers who previously defaulted or were in arrears.

“New start”, a new federal initiative

When the payment moratorium ends, troubled borrowers who had fallen behind on their payments before the pandemic hit will get what the federal government calls a “fresh start.”

According to the US Department of Education, any borrower who was in default or delinquent before the loan repayment moratorium will come out with a clean slate. Arrears and defaults will be removed from borrowers’ credit history, and individuals will once again be able to make their payments in good standing.

The DOE has released little information on how the Fresh Start program will be implemented. One question that is unclear is whether these rehabilitated borrowers will now have access to programs that had been closed to them, such as federal income-tested repayment plans and civil service loan forgiveness. Will they also be eligible to start borrowing again through the federal financial aid system?

It is estimated that around 10 million borrowers will be able to take advantage of the Fresh Start initiative. Within this group, about 3 million borrowers were in arrears and 7 million were in default. Borrowers are considered in default if they fail to make their scheduled loan payments for at least 270 days. Borrowers are considered delinquent if they are one day past due on their loan payment, but default is not reported to the three major credit bureaus unless the loan is 90 days past due. days.

About one in six borrowers whose student debt is managed by the federal government is in default. The year before the pandemic, over 1 million Direct loan borrowers defaulted.

The Fresh Start initiative has not received much publicity as it was briefly mentioned in April when the administration announced it was extending the loan suspension for the sixth time.

One question I have about erasing delinquency or default from borrowers’ records is whether it will have a deleterious impact on future borrower behavior. It will be interesting to watch.

Borrowing parents and repayments

Federal Direct Parent PLUS Loans have been eligible for the federal repayment moratorium, but Federal Parent Loans have never benefited from all of the safeguards that federal student loan borrowers enjoy. And, of course, the interest rate on the federal parent loan is always higher than the direct student loan.

After leaving school, students who have borrowed through Federal Direct Loans can select one of four income-based repayment programs that are helpful if a borrower’s debt exceeds their capacity. pay according to household income and size. Essentially, borrowers in these programs can repay their loans based on their income, not what they owe.

Parents who rely on PLUS loans have not benefited from federal income-based repayment options, although students who use the PLUS loan for graduate and vocational degrees may take advantage of these repayment programs.

Many parents could benefit from an income-driven plan because the nature of the PLUS loan makes it incredibly easy to outgrow financially. After a student’s grants and scholarships are subtracted from the cost of attending a school, a parent can borrow the rest. In some cases, this can amount to tens of thousands of dollars per year.

Fortunately, however, there is a little-known loophole that will allow parents to take advantage of one of the federal income-tested reimbursement programs. PLUS loans taken out on or after July 1, 2006 will qualify if they transfer their PLUS loans to the Federal Direct Consolidation Loan. Parents who jump through this hoop will be eligible for the income-contingent reimbursement plan. This ICR plan is the oldest and has the least desirable conditions, but it could benefit many parents.

Under ICR, payments are set at 20% of discretionary income for 25 years or 12 years of fixed payments, whichever is lower.

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