Can i get financial aid if my student loans are in default

Publication Date

August 17, 2022

Subject

Federal Student Aid Eligibility for Borrowers with Defaulted Loans

Summary

This letter provides guidance to schools on awarding federal student aid under Title IV of the Higher Education Act of 1965 (HEA) to students with defaulted loans.

Dear Colleague:

The U.S. Department of Education (Department) announced on April 6, 2022, that it would eliminate the negative effects of default for borrowers who defaulted on their federal student loans prior to the pandemic payment pause. Among other features, this initiative, called “Fresh Start,” will enable borrowers with defaulted federal student loans to regain Title IV HEA federal student aid eligibility, including Federal Pell Grants and campus-based aid like Federal Work-Study. Access to federal student aid can provide a pathway for additional education, which can help these borrowers compete in the job market and ultimately improve their ability to fully repay their loans, among other benefits. These borrowers will also have the chance to enroll in an income driven repayment plan or access other repayment options that suit their needs. This Fresh Start initiative will remain available to previously defaulted borrowers, as identified above, for one year after the end of the COVID-19 pandemic student loan payment pause. Simply put, these borrowers will have at least one year to make payment arrangements before defaulting on their debts and/or being subject to further collections efforts like most other borrowers eligible for the payment pause. This one-year period is referenced throughout this Dear Colleague Letter (DCL) as the Fresh Start period.

We want to emphasize that the guidance in this DCL applies only when awarding aid to borrowers who are currently ineligible based solely on a prior Title IV loan default, and who qualify to have their eligibility restored through the Fresh Start initiative or in accordance with DCL GEN 21-03. Students who are ineligible for any other reason (e.g., failing to meet satisfactory academic progress standards, owing an overpayment on a Title IV grant, or being in default on a Perkins Loan that is held by a school) are not eligible to receive Title IV aid unless the eligibility issue is resolved. A school's failure to comply with the guidance in this letter may result in a determination that the school has awarded Title IV aid to an ineligible student.

The Fresh Start initiative restores Title IV aid eligibility for borrowers with loans in the following categories that defaulted prior to the start of the student loan repayment pause on March 13, 2020:

• William D. Ford Federal Direct Loan Program loans (Direct Loans);

• Federal Family Education Loan (FFEL) Program loans, including Federal Insured Student Loans (FISL); and

• Federal Perkins Loans (Perkins Loans) that are serviced by the Department's Debt Management and Collections System (DMCS).

The Fresh Start initiative requires that a school receiving an Institutional Student Information Record (ISIR) showing that a student has one or more of the loan types listed above that defaulted before March 13, 2020, may award Title IV aid to the student in accordance with all normal student and program eligibility requirements provided that the school:

• Maintains in the student's file a screenshot of the National Student Loan Data System (NSLDS®) loan detail information showing that the default date (see below) for the loan was prior to March 13, 2020. The school must retain this documentation for three years after the end of the award year in which the student last attended the school.

  For Direct Loans, the default date is the most recent "Start" date for transfer of the loan to DMCS as shown under "Guaranty Agency/Lender/Servicer Agent History" in the "Loan Detail" section.

  For FFEL Program loans, the default date is the most recent "Insurance Claim Payment" date with a "Reason Code" of DF or DU shown under "Claim Details for Loan" in the "Loan Detail" section.

  For Perkins Loans, the default date is the most recent "Start" date for transfer of the loan to DMCS as shown under "Guaranty Agency/Lender/Servicer Agent History" in the "Loan Detail" section.

• Retains in the student's file a signed and dated acknowledgment (see below) from the student or parent (parent acknowledgment will only be required if applying for a Direct PLUS loan for parents) of participation in the Fresh Start initiative that must contain the following language:

  “I, [full name], understand that I am eligible for Title IV aid as a result of the Fresh Start initiative. As a Fresh Start-eligible borrower, I understand that, by accepting Title IV HEA federal student aid during the Fresh Start period, I am agreeing to have my defaulted loans transferred to a new loan servicer – the company that will manage my loan - which will result in continued Title IV, HEA federal student aid eligibility beyond the Fresh Start period. I understand that this transfer may not occur immediately and that I can contact the holder(s) of my defaulted loan(s) to request transfer sooner.”

The school must retain this acknowledgment for three years after the end of the award year in which the student last attended the school. Once new aid is disbursed to borrowers who qualify under the Fresh Start initiative, the Department will automatically initiate a transfer of the borrowers' defaulted loans to a non-default loan servicer. This transfer will remove the default status of the loans and allow the borrowers to remain eligible to receive Title IV aid beyond the Fresh Start period.

Schools may award and disburse Title IV aid to a student who would otherwise be ineligible due to a prior default only during the Fresh Start eligibility period.

If a school receives an ISIR after the end of the Fresh Start eligibility period showing that a student is in default on a Title IV loan (including a student who previously received aid through the Fresh Start initiative), the student may not receive Title IV aid unless the student first resolves the default by repaying the defaulted loan in full, making satisfactory repayment arrangements on the loan, rehabilitating the loan, or consolidating the loan.

The guidance provided above applies when awarding aid to students who defaulted on loans prior to the start of the student loan repayment pause (March 13, 2020) and who qualify for Title IV aid under the Fresh Start initiative. When awarding aid to students who defaulted on or after the start of the payment pause (and prior to the payment pause end date), which are primarily FFEL loan borrowers, different guidance applies.

Defaulted FFEL Program loans held by guaranty agencies that are not subject to an active bankruptcy filing are in "Population 2" as described in DCL GEN 21-03. As explained in that DCL, loans in Population 2 will be assigned to the Department and are immediately eligible for Title IV aid. However, many of these loans have not yet been assigned to the Department and will continue to show a default status in NSLDS while they remain with the guaranty agency.

Students who are otherwise eligible and who have defaulted FFEL Program loans in Population 2 are eligible to receive Title IV aid effective March 12, 2021 (the publication date of DCL GEN 21-03). A school that receives an ISIR showing that a student has a defaulted loan in Population 2 may award Title IV aid to the student in accordance with all normal student and program eligibility requirements provided that the school maintains in the student's file a screenshot of the NSLDS loan detail information showing that the default date was on or after March 13, 2020. The school must retain this documentation for three years after the end of the award year in which the student last attended the school. In these circumstances, the default date determination method is the same as described in the guidance above for students with FFEL Program loans that defaulted prior to March 13, 2020.

Because loans in Population 2 will be automatically assigned to the Department for servicing by a new servicer at a later date, there is no requirement for the student to sign an acknowledgment that the loan will be transferred.

Colleges should also consider opportunities to address other forms of debt or financial stress that can prevent students from re-enrolling, diminishing the intended benefits of the Fresh Start initiative. The Department encourages colleges to consider steps to help these borrowers, such as using Higher Education Emergency Relief Funds (HEERF) or their own funds to discharge unpaid institutional balances or consider policies that allow all students to enroll, access, or transfer their official academic records. The Department also released a DCL GEN-22-02 reminding colleges how and under what conditions they can use FAFSA data to aid in the administration of several other Federal benefits.

Colleges can find more guidance on the Department’s waivers and flexibilities here.

The Department appreciates the cooperation of schools in helping these borrowers receive a fresh start to help ensure greater financial security and continued pursuit of a higher education.

Sincerely,

Richard Cordray
Chief Operating Officer
Federal Student Aid