Regret Paying Student Loans During the Pause? You Can Get a Refund

You weren’t wrong if it seemed like responsible adulting to plug away at student loan payments during the nearly three-year pause. After all, paying down the balance on a loan while interest is frozen is usually a good thing.

But for some borrowers who paid while politicians debated student loan forgiveness, that bet against the White House may not pay off.

For others,  their payments may 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 forbearance — which paused interest and payments on federal student loans since March 2020 — is extended through Dec. 31, 2022.

While millions struggling with student debt rejoiced, many borrowers who paid all along were confused and dismayed. Those who paid off loans or have a few thousand dollars left had needlessly reduced a balance that would have fallen under forgiveness now.

However, some of these borrowers are eligible for a refund on payments made since March 2020.

Here’s how to tell if your student loans are eligible for a refund. And some things to consider before you rush to maximize student loan forgiveness and put cash back in your pocket.

Can You Get a Refund on Student Loan Payments Made During the Pause?

Nearly 40 million borrowers whose direct federal loans are part of the U.S. Department of Education administrative forbearance are eligible for a refund of any payments they made since March 2020.

However, only a tiny percentage of these borrowers opted to continue making payments during the pause. This refund was always available to borrowers but takes on new meaning now that student loan forgiveness has been announced.

Borrowers can contact their loan servicer to determine their eligibility for a refund. This process is not automatic. It is the borrower’s responsibility to request a refund.

As borrowers rush to maximize their eligibility, servicers are warning that processing payment refunds may take six to nine months.

Who Qualifies for Student Loan Payment Refunds?

There’s a lot of buzz but not a lot of 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 paying based on U.S. Department of Education data he analyzed.

Borrowers eligible for refunds need to be aware of the following criteria.

• Eligible loans are part of the William D. Ford Federal Direct Loan Program. This includes direct subsidized, unsubsidized, PLUS and consolidation loans.
• Only payments made since the forbearance period began in March 2020 are eligible.

Some types of student loans are not eligible for payment refunds, mainly because these loans were secured using private funding. These include private student loans and some Perkins, HEAL and  FFELP loans — most student loans that predate 2010 are in this category.

If your loans weren’t eligible for the payment pause, odds are they aren’t eligible for forgiveness.

These stipulations mean that millions of borrowers are not currently eligible for student loan forgiveness. The Biden administration is working to address that concern.

In the meantime, FFELP and other borrowers may be eligible to consolidate their loans into the federal direct loan program. Once consolidated, those loans would become eligible for forbearance and student loan forgiveness.

How to Get a Refund on Your Student Loan Payments

As you might expect, you’ll need a lot of patience to get through the refund process. Long wait times as federal loan servicers struggle with increased call volumes are certainly part of the problem, but there’s also a lot of confusion.

To get a refund, you need to call your loan servicer but first:

• Do your research. Read up on your loans and potential options.

• Prepare to advocate for yourself. You may need to explain why you believe you’re entitled to a refund and answer any questions.

• Have the necessary info ready. This includes your Social Security number and proof of any payments you’ve made since March 2020.

How a Refund Can Maximize Student Loan Forgiveness

If you paid off your loans during forbearance or your balance is below $10,000 or $20,000, it may be beneficial to ask for a refund.

Let’s say you started March 2020 with $7,500 in eligible federal student loan debt and paid your balance down to $5,000 during forbearance. Requesting a refund means you’d get the $2,500 back, and that amount would be added to your loan balance.

When student loan forgiveness happens, the full $7,500 would be forgiven, instead of just $5,000. What you do with the $2,500 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’ve come to a critical 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 significant even with forgiveness, those payments should stay right where they are. Unless you’re currently undergoing financial hardship, asking for a refund might financially set you (and your credit score) back.

And there are some states — including Alabama, Arkansas, Mississippi and New Jersey — where loan forgiveness might come with a hefty price tag.

“Some states provide tax-free status for student loan forgiveness, and some do not,” 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 sounds like stumbling into a payday, but weigh your decision carefully and proceed with caution.

For some borrowers, a refund may just delay and complicate paying the piper down the road.

Kaz Weida is a senior writer for The Penny Hoarder.