Firstly, the start.php file is no longer necessary in all cases for Elgg 3. In this case here you don't need it. It should work without the file being present.

Secondly, I see no obvious error with the manifest.xml file. The name and file permissions seem alright. Maybe it's a matter of text encoding within the file. Are you sure that you have only the following within the file

<?xml version="1.0" encoding="UTF-8"?>
<plugin_manifest xmlns="http://www.elgg.org/plugin_manifest/1.8">
    <name>Notification Default Settings</name>
    <id>notifications_defaults</id>
    <author>Your name</author>
    <version>1.0</version>
    <category>enhancement</category>
    <description>Set default values of site and email notification user settings to on.</description>
    <copyright>(c) Your name</copyright>
    <license>GNU General Public License version 2</license>
    <requires>
        <type>elgg_release</type>
        <version>3.0</version>
    </requires>
</plugin_manifest>

with no empty line in the beginning?

Which text encoding have you saved the file with? If your editor has the option to save in different encodings you should use "UTF without Byte Order Marks". Especially "without Byte Order Marks" (BOMs) is important as there are likely errors if Byte Order Marks are included in the file (these are invisible characters at the beginning of the file).

Use this plugin.

Also, updated My plugin for Elgg 3.

Enjoy!

Wow, Thanks RvR!!!