Avoiding your federal student loans isn’t really a problem until one day it is—your credit score drops, your paycheck gets garnished, or your tax refund is withheld. For more than four years, federal student loan borrowers have been largely shielded from the consequences of missed payments and default, but that’s about to change. September 30th marks the end of two initiatives that have been helping borrowers: the “on-ramp” and the Fresh Start program. Here’s what you need to know:
End of the “on-ramp”
Although federal student loan repayment restarted last year, borrowers haven’t had their missed or late payments reported to the credit bureaus. This has shielded borrowers from any negative impact on their credit scores. However, after the end of September, student loan servicers will commence reporting missed or late payments to the credit bureaus, meaning borrowers’ credit scores will be impacted by missed or late payments going forward.
What this means for you: If you have federal student loans that you haven’t been paying, it’s time to take action. Here are your options:
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Start making your payments: If you can afford to do so, rework your budget to start making your student loan payment by your October due date. This is the best option as it will get you on track toward paying off your loan.
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Apply for an income-based repayment plan: If you don’t feel you can afford your current payment, you might benefit from an income-based repayment plan. The loan simulator can help estimate your payment on an income-based repayment plan (although Federal Student Aid notes that information about income-based repayment plans, including the SAVE plan may not be accurate right now). The online application for income-based repayment plans is not available but you can apply by filling out a paper application and uploading it to your account on your servicer’s website.
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Borrowers applying for a new or different income-based repayment plan may be placed in a processing forbearance for up to 60 days during which interest will continue to accrue. If the application is not processed in that time, the borrower will be placed in administrative forbearance during which interest will not accrue.
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Request deferment or forbearance: If you need a temporary reprieve to get your financial situation in order to start paying your loans again, a deferment or forbearance could help. During this time, you won’t be required to make payments, but depending on the type of loans you have and your financial situation, interest may still accrue.
End of the Fresh Start initiative
The Fresh Start initiative is designed to help borrowers who have defaulted on their federal student loans. It offers a path toward getting out of default and back in good standing. It includes the following benefits:
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It will remove the default from your credit report.
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It will prevent wage garnishment or your tax refund from being seized.
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It will allow you to apply for an income-based repayment plan and become eligible for the Public Service Loan Forgiveness program (if qualified).
The Fresh Start initiative is especially helpful for anyone who has unsuccessfully tried to rehabilitate their loans before since this does not count towards the one-time limit.
To take advantage of the Fresh Start initiative, borrowers whose loans are held by the U.S. Department of Education can log into their account via myeddebt.ed.gov, call the Default Resolution Group at (800) 621-3115, or send a letter including your name, social security number, and birthday to P.O. Box 5609, Greenville, TX 75403.
If a borrower’s loans are held by a guaranty agency, they can call (800) 621-3115 to be directed to their agency.
