Borrowers with federal student loans have received some welcome relief when it comes to payments and interest charges since March of 2020. That’s when the federal government announced a pause on payments and fixed 0% interest rates on most federal student loans through their Covid-19 relief. plan.
This relief has been extended multiple times since then, although it’s currently set to expire on May 1st, 2022.
What does this mean for borrowers with federal student loans? For those who have enjoyed deferment on their loans the entire time, it means they’ll have to pick up where they left off with their payments come May of this year. Borrowers who skipped payments will technically be two years behind on the repayment plan they were on before the pandemic hit, but no other penalties will apply.
For those who kept making payments throughout the deferment period, on the other hand, it means they can continue on making payments as they normally would.
That said, the US Department of Education is also letting student borrowers get a refund on any payments they made toward their federal student loans since March of 2022. While this fact hasn’t been heavily advertised, you can read the basics on the studentaid. gov website.
Specifically, here’s what the page says:
“You can get a refund for any payment (including auto-debit payments) you make during the payment pause (beginning March 13, 2020). Contact your loan servicer to request that your payment be refunded.”
Now may be your last chance to get a refund on student loan payments you made during the pandemic, but should you take advantage of this option? According to the experts, that depends on your unique circumstances and whether you truly need the money.
When Does It Make Sense To Get A Refund Of Your Federal Student Loan Payments?
If you’re tempted to get a refund on payments you made toward student loans during the pandemic, you’re certainly not alone. It’s estimated that you’d actually be 1,750 ahead financially if you DIDN’T make extra payments on your student loans – so you may be kicking yourself.
With inflation at 40-year highs and housing costs growing at a record pace, it could make sense to access money you paid and use it for another purpose – even if that purpose is just keeping up with regular bills.
If you’re struggling financially, that’s another reason to consider getting a refund on payments you made all along. By getting your money back, you can basically pick up back where you started with your student loans come May 2022. However, you’ll get the added benefit of having your money back in your own bank account, where you can use it to stay afloat with your finances until your situation improves.
Financial advisor Evon Mendrin of Optometry Wealth Advisors says another big reason to opt for a refund is if the borrower realizes they’re eligible for federal loan forgiveness. This could be Public Service Loan Forgiveness (PSLF) or forgiveness through an income-driven repayment plan, he says.
Mendrin points out that the months during the federal loan pause already count as payments toward forgiveness, even though borrowers weren’t actually making any.
“The goal of forgiveness is to pay as little as possible and get as much as possible forgiven, so there’s no reason to make payments during the pause,” he says.
Mendrin also says it can make sense to get a refund in order to tackle “bad” or unproductive debt instead. If you have high interest credit card debt, for example, using refunded student loan payments to pay it off could be a boon for your finances. After all, the average credit card interest rate is currently over 16%, whereas federal student loans will charge rates that range from 3.74% to 6.28% in 2022.
According to Joseph Orsolini of College Aid Planners, a final reason to get a refund of student loan payments is if your state offers a tax break for contributing to a 529 plan. As part of the SECURE Act, you can now use 529 plan funds (up to K 10K) to pay off student loans, he says.
“By getting a refund and then running payments through the 529 plan first, you can take advantage of this state tax break,” says Orsolini, adding that the money only needs to be in the account for five business days to qualify.
Why You Shouldn’t Get A Refund
If you’re looking for reasons to skip getting a refund on your student loan payments, the biggest one is having the belief that student loan debt will not be canceled in the near future. After all, you wouldn’t want to let the government keep that money if student loan debt will be forgiven a few years from now. Unfortunately, it seems very unlikely that student loan debt will ever be forgiven, and not particularly on a massive scale.
If you made payments during the Covid-19 relief period, you moved your payoff date up significantly farther than borrowers who didn’t. It has been a full two years since payments on federal student loans were originally paused and interest rates were set at 0%, so getting a refund now would essentially “undo” all the progress you made during that time.
Worse, you would have to begin making interest payments on debts you already paid off once.
According to Melanie Hanson, who is Editor in Chief at EDI Refinance, this is the financial equivalent to taking out a loan for the amount of the refunded payments at the rate you’re paying on your student loans.
“When you’re deciding if getting these refunds is worthwhile, this is the metric against which you should compare,” she says.
The Bottom Line
You can get a refund on payments made to your federal student loans since March 2020, but should you? That’s a question only you can answer.
At the end of the day, you should think about what you really want and need. Do you need access to cash to avoid falling behind on bills or racking up more debt? Or, you would rather have the peace of mind that comes with knowing your student loans will be paid off according to your original plan.
If you don’t need the money from your student loans at all, then you should probably just leave your payments where they’re at.