Episode Transcript
Brenton: [00:00:00] Having a student Loan in default is one of the worst things that could happen to a person financially.
But luckily, the Department of Education is offering a one-time opportunity for defaulted borrowers to come out of this status with a simple phone call. And in this episode, we'll tell you how it works. Let's get started.
Brenton: Hello, my name is Brenton Harrison of Escape Student Loan Debt, and your host for the Escape Student Loan Debt podcast.
Today's episode is one that I struggle figuring out when to release it because it's not something that affects the typical listener of the show, but for those who are impacted by it, it has an outsized effect on your finances, and that is having a federal student Loan in default.
Default is a student Loan status where you go from having a late payment to having a delinquent student Loan to after at least 270 days of past [00:01:00] due payments, you are formally given the status of default. There's a number of reasons why this is financially consequential. The first is just in terms of how much you owe.
When you have a defaulted student Loan, your current servicer will transfer that Debt to essentially a federal collections agency that partners with the Department of Education. And they will hound you trying to negotiate some type of payment for your plan and your loans. And if you're not responsive, they can go as far as garnishing things like your paycheck, where before you even get what you received every two weeks the collections agency has already removed money and sent it toward your loans. They can also garnish things like your federal tax refund. So instead of you getting that 2000 or 3000 that you might have been owed, they will take it and they will use that to put toward your past due Debt.
It also has an impact on your credit. Having a defaulted status on your student Loan is almost akin to having a bankruptcy on your credit report because it will stay on that report for the same period of time, at least [00:02:00] seven years from the date that it was initially reported.
And it may seem like I'm exaggerating to say that it's almost like having a bankruptcy on your credit report, but depending on your future goals for your finances, it is really very similar because with a bankruptcy on your credit report, in many cases you'll be ineligible to pursue things like getting a new home Loan or a business Loan, or in some cases a car Loan.
And if you're looking for federal financing, having a defaulted student Loan could have the same impact. Because not only is there a credit report for the general consumer, If you have taken out federal Debt, you also have what's called a credit alert verification reporting System score.
And this is almost like a separate credit report or a separate credit score just for people, have taken out loans from the government directly, or a government backed agency.
This report is colloquially known as CAIVRS, and if you default on a federal student Loan, that not only shows up on that credit report, it shows up on your CAIVRS report as well.
And if you're trying to get any other future financing for a federally backed Loan, like an FHA [00:03:00] a Loan, or a mortgage that's backed by the federal government, you won't be allowed to do so until that default status is removed. So as crazy as that sounds, you might be trying to get your dream home. Aside from your student loans, everything might be in order in terms of your finances.
When they pull that CAIVRS report and see that you have a defaulted student Loan, that alone could prevent you from a mortgage regardless of what else is going on with your finances.
Believe it or not, it doesn't stop there. Depending on the state in which you live. There are some states where people who have defaulted student loans can even have their professional licenses revoked until that status is removed.
If you're a nurse in one of those relevant states, you could be prevented from doing your job because they suspend that professional license all because of a student Loan Debt.
And if you're wondering how long this can last, consider this that last bit of salt in the wound.
Unlike most other forms of Debt, federal student loans is a form of Debt that has no statute of limitations. By which point the government can stop pursuing you for that defaulted Debt. [00:04:00] What that means is if you're 20 years old, when you take out that student Loan and you decide that you're gonna ignore them for 80 years on your hundredth birthday, they can still hunt you down for that student Loan, Debt.
They do not have the ability to say, Hey, it's been seven years, we're gonna walk away because we have no recourse here.
So that's the impact on your general finances, but here's the impact that's consequential as it relates to the student Debt itself. When you have a federal student Loan, in default, you are prohibited from getting any future student Loan financing from the federal government.
If you're trying to go back to school and get another Loan or another grant, you can't do so as long as you have an old Loan that's still in default status. You also are ineligible for forgiveness programs like Income, Driven Repayment Program or Public Service Loan forgiveness program. Even if you have student Loan payments that bump you up towards those ,totals because your student Loan is in default, they will not discharge it or forgive it as long as you have that defaulted status.
So for many, many reasons, it's something that you want to avoid. But for those who [00:05:00] haven't been able to avoid it before the pandemic, there was a process that they could use to pull their student loans out of default One time called student Loan Rehabilitation. And this was a 10 month process where if you met a certain number of metrics, you could have the defaulted status removed from your credit report.
You could be back on good standings when it comes to things like forgiveness programs. And you can pursue any of the options that you so chose, there were other options like consolidating your loans or paying them off in full that were less appealing. But I would say the best option that you had was that one time only rehabilitation that took 10 months.
It took a significant amount of money it's something that while you should have pursued it, if you had a student Loan in default at that time, it didn't necessarily mean it was easy to do so. But thankfully, as a result of the pandemic, the Department of Education released a program called the Fresh Start Program that gives you a number of opportunities to have student Loan payments counted even when you were in default status. [00:06:00] And after the break, we'll tell you how you can accomplish this with a simple phone call to your current servicer.
[00:07:00]
Brenton: If you're following along with us on screen, we're reading about the benefits of the Federal Fresh Start Program, which is the Department of Education's initiative to pull borrowers out of default and put them back into good standing with the federal government.
Some of those benefits that you receive automatically is you have access to new federal student aid. So as we talked about, you're prevented from taking loans if you're in default. Now, if you do fresh start, you can take out new loans or new grants if possible. They also will stop collections.
So if before the pandemic you were having your wages garnished, or your tax refunds garnished as a result of a defaulted student, Loan, this Fresh Start program will allow that to cease.
You also regain your eligibility to take out other government loans. And the reason that that happens, because when you take advantage of Fresh start, they remove your default status from your CAIVRS report.
So if you're looking for that F H A Loan or that federally backed Loan, it's as if this didn't happen. If you go through Fresh Start, it also restores your ability to go through the student Loan rehabilitation process. Now, [00:08:00] this is important because the Fresh Start Program is a temporary program and when it ends, and it will end a year after student Loan payments resume, If you have federal student loans that fall into default again in the future, and you had never taken advantage of student Loan rehabilitation, remember you could only do it one time.
They're saying that the Fresh Start program would allow you to be eligible for that in the future without counting fresh start as that one opportunity.
And then lastly, they will amend your credit report so that your status with your student Loan says current instead of in collections with a credit reporting agency, which is the equivalent of having that default or that bankruptcy.
So in this process, instead of having this stay on your report for seven years, the Fresh Start Program will allow you to have that removed in quick order.
Now there are a number of other big benefits that you have from this as well specific to the student loans themselves. One of them being that you have access to Income Driven Repayment plans, which you couldn't use when you had a student Loan in default. You also regain your eligibility to have your student loans [00:09:00] forgiven through General Income, Driven, Repayment plan forgiveness, or through programs like public service Loan forgiveness.
And you can once again have your student loans put into forbearance or deferment if needed, which is something you were also ineligible to do with a defaulted student, Loan.
So how do you apply? Well, the Department of Education claims that this process takes less than 10 minutes, and there are a few ways that you can go about it. The first is, if you have already had your student loans transferred to that collections agency, then you can go to myeddebt.ed.gov, and you can log into your account if you've created one. This is for people who have federal defaulted student loans to go in and check their status, communicate with their guarantor or their credit agency. So if you have an account, you can log on and you can take care of the application process on that site.
Now if you don't have a login for that site, you can call, the number is 1 800 621 3115, and they let you know that they would ideally have you have access to your last [00:10:00] tax return. When you call and if you have that access, it says it's gonna take about 10 minutes for a representative to walk you through some information so that you can formally apply for Fresh Start.
And then lastly, if you are analog and you wanna mail something to them requesting it, you can write to PO Box 5609 Greenville, Texas zip code 75403. And in the letter you can give your name, social security number, date of birth, and put in the letter And I quote, I would like to use Fresh Start to bring my loans back into good standing end quote.
Now when this happens, they will transfer that defaulted Loan from the default resolution group or whatever guarantor agency that is being used back to your Loan service, your original Loan servicer. They will put your loans into end Repayment status, and they will remove that default from your credit report at that time.
So this is a great program and if you have a defaulted student Loan and you're saying, oh, one day, I'll take care of that, the time to act is now. As I said, the Fresh Start Program is a temporary program [00:11:00] and it will end a year after student Loan payments resume.
But it's also important when it comes to things like the Income Driven Repayment Plan Waiver and the Public Service Loan Forgiveness Waiver that we discussed. And here's why: one of the allowances that we found in the IDR waiver frequently asked questions document that we covered a couple episodes ago is that if you have a borrower who takes advantage of the Fresh Start Initiative before the program ends, the government will actually give you credit for the months that you were in default from March, 2020 until the time that you finished the Fresh Start Program. So even though you were in default at that time, and you could have been in that status for three plus years, by this point, they will act as if that payment was made and consider it counted towards programs like Income Driven Repayment Plan, and like we covered, because the public service Loan forgiveness is giving that credit as well, you could have three plus years credited towards public service Loan forgiveness as well.
Now the problem is if you do not take advantage of fresh start and [00:12:00] you just simply rehabilitate your loans, they'll only give you credit for the student Loan payments that you've actually made once the Loan has rehabilitated. They won't give you credit in that scenario for defaulted months, that might have gone back to March 2020.
So if your loans are in defaulted status, you not only need to take advantage of this now, if you're aiming to have them forgiven under one of these programs. You also need to remember that you could have a commercially held Loan, like an FFEL Loan that was backed by the federal government, but actually managed and owned by a private entity.
So if that's the case, you still can take advantage of fresh start and pull it outta default. But after you've taken it out of default, you do need to still consolidate it into a direct consolidation Loan in order to make sure that you get that credit. And to do so, that has to be done before the end of 2023 cuz that's the last period of time where ineligible loans will be considered once they're consolidated for the IDR waiver.
So I hope this episode was useful to you. It may have only been useful to a smaller subset of the people who listen to the Escape Student Loan Debt [00:13:00] podcast, but every student Loan scenario matters, so we want to make sure that we gave you an understanding if you're in that status of what you can do to benefit yourself when it comes to your student loans.
We'll be back in a couple weeks with an episode that applies to everybody who has this type of Debt, and I hope to see you then. Talk to you soon.
