You weren’t wrong if it seemed like a responsible adult to refrain from paying student loans during the nearly three-year hiatus. After all, paying off a loan balance while interest is frozen is generally a good thing.
But for some borrowers who paid off while politicians debated student loan forgiveness, that bet against the White House might not pay off. For others, their payments can be refunded.
The Biden administration announced in August that it would forgive $10,000 of student debt per borrower on federal loans and $20,000 per borrower for Pell Grant recipients.
The U.S. Department of Education also announced that the forbearance — which has suspended federal student loan interest and payments since March 2020 — is extended through December 31, 2022.
While millions of people struggling with student debt rejoiced, many borrowers who still paid were confused and appalled. Those who have paid off loans or have a few thousand dollars left have unnecessarily reduced a balance that would have now fallen under forgiveness.
However, some of these borrowers are eligible for a refund on installments made since March 2020.
Can you get a refund on student loan payments during the break?
Nearly 40 million borrowers whose direct federal loans are part of the U.S. Department of Education’s administrative forbearance are eligible for a refund of all payments they’ve made since March 2020.
However, only a tiny percentage of these borrowers chose to continue making payments during the break. This refund has always been available to borrowers but takes on new meaning now that the cancellation of student loans has been announced.
Borrowers can contact their loan servicer to determine their eligibility for reimbursement. This process is not automatic. It is the borrower’s responsibility to request a refund.
As borrowers race to maximize their eligibility, services warn that processing payment refunds can take six to nine months.
Who is eligible for reimbursement of student loan repayments?
There’s a lot of buzz but not many details about who is eligible for a refund of student loan payments. Mark Kantrowitz, a student loan expert, says only about 1.2% of borrowers continued to pay based on US Department of Education data he analyzed.
Borrowers eligible for repayments should be aware of the following criteria.
- Eligible loans are part of the federal William D. Ford Direct Lending Program. This includes direct subsidized, unsubsidized, PLUS, and consolidation loans.
- Only payments made since the start of the forbearance period in March 2020 are eligible.
Track trends affecting the local economy
Subscribe to our free Business by the Bay newsletter
We’ll break down the latest business and consumer news and information you need to know every Wednesday.
You are all registered!
Want more of our free weekly newsletters in your inbox? Let’s start.
Explore all your options
Certain types of student loans are not eligible for repayment of payments, mainly because these loans have been guaranteed by private funds. These include private student loans and some Perkins, HEAL and FFELP loans – most pre-2010 student loans fall into this category.
If your loans were not eligible for the payment break, chances are they are not eligible for forgiveness.
These stipulations mean that millions of borrowers are currently not eligible for student loan forgiveness. The Biden administration is working to address this concern.
In the meantime, FFELP and other borrowers may be eligible to consolidate their loans into the Federal Direct Lending Program. Once consolidated, these loans would become eligible for student loan forbearance and cancellation.
How to get a refund on your student loan payments
As you can imagine, you will need a lot of patience to get through the refund process. Long wait times as federal loan services grapple with increased call volumes are certainly part of the problem, but there’s also a lot of confusion.
To get a refund, you must call your loan servicer, but first:
- Do your research. Learn about your loans and potential options.
- Prepare to defend yourself. You may be asked to explain why you believe you are entitled to a refund and answer any questions.
- Prepare the necessary information. This includes your social security number and proof of all payments you’ve made since March 2020.
How a Refund Can Maximize Student Loan Forgiveness
If you have repaid your loans during forbearance or your balance is less than $10,000 or $20,000, it may be beneficial to request a refund.
Let’s say you started March 2020 with $7,500 of eligible federal student loan debt and paid off your balance at $5,000 while on forbearance. Requesting a refund means you will get the $2,500 back and that amount will be added to your loan balance.
When the student loan forgiveness occurs, the entire $7,500 would be forgiven, instead of just $5,000. What you do with the $2500 windfall is up to you.
Should you get a refund on your student loan payments?
Now that you know how to get a refund, we have come to a crucial question. You can ask for a refund, but should you?
It’s complicated, but there are a few scenarios where a refund doesn’t make sense.
If your student loan debt remains large even with the forgiveness, those payments should stay where they are. Unless you’re currently in financial difficulty, asking for a refund could set you back financially (and your credit score).
And there are some states — including Alabama, Arkansas, Mississippi and New Jersey — where loan forgiveness can come at a steep price.
“Some states offer tax-exempt status for student loan forgiveness, and some don’t,” says Kantrowitz of The College Investor. “This could be an unexpected tax bomb waiting for some Americans.”
Getting a refund on your student loan payments feels like stumbling on a payday, but weigh your decision carefully and proceed with caution. For some borrowers, a refund may simply delay and complicate paying the piper down the road.
This story originally appeared in The Penny Hoarder.