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New Federal ‘Fresh Start’ Student Loan Policy May Help Prisoners in Default

by Matt Clarke

On April 26, 2022, the U.S. Department of Education (DOE) announced a new “fresh start” policy for people whose student loans are in default, and it may help prisoners who would otherwise be barred from receiving Pell Grants when they become available next year.

The policy brings all eligible defaulted loans into “good standing,” meaning there is no longer a default on the borrower’s record. That also means federal student aid eligibility is restored and collection efforts will cease.

DOE also announced a nearly 50% expansion of Pell sites under the Second Chance Act, rising by 73 to a total of 200. That program was initiated in 2016 by former Pres. Barrack Obama (D) as a step toward full restoration of Pell Grants for prisoners, who had been removed from eligibility in 1994. In 2020, Congress lifted the prisoner ban from the grants, which partially fund college education for low-income students, with full reinstatement scheduled for July 2023. [See: PLN, May 2022, p.44.]

However, those in default on student loans are ineligible for Pell Grants. Many prisoners don’t even know they are in default, moreover, and are unable to request a deferral while they are incarcerated because they lack access to the department’s toll-free telephone number and the necessary paperwork.

There are two other ways to eliminate a student loan default and restore Pell Grant eligibility unrelated to the Second Chance Act. The first is to pay off the loan in full — a daunting task for prisoners who earn little or nothing for their labor. The second is a process called rehabilitation, in which DOE brings into good standing the defaulted loan of any person making nine consecutive monthly payments of at least five dollars.

Even such a low bar as that can be an impossible hurdle for prisoners to clear, however. A request for permission to make a payment from a prisoner trust fund account may have to pass through layers of bureaucrats who take varying amounts of time, making it difficult, if not impossible, to be on time with payments nine months in a row.

Curing a student loan default does not end the obligation to make payments on the loan, but prisoners can seek deferment of payments while they are incarcerated. Be careful, though: A second default means permanent ineligibility for future federal student financial aid.

DOE has another process for writing off the student loans of prisoners with sentences between ten-years and life. This stops collection efforts but does not cure the default and does not restore Pell Grant eligibility. The department has already written off the student loans of over 25,000 prisoners.  

Sources: Open Campus Media, U.S. Department of Education

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