Thanks to the federal student loan repayment moratorium that’s been in place since March 2020, student loan borrowers have not had to make loan payments or accrue additional interest on their debt.
Some, however, used this as an opportunity to put all of their money toward paying down the debt principal and get ahead on their loans. Now, because of President Joe Biden’s student loan forgiveness, it turns out they may be eligible to receive a refund for any payments made during the pause.
Below, Select takes a closer look at what you need to know about getting a refund, and some ideas for what to do with your sudden windfall.
How to get refunded for pandemic-era payments
When you’re faced with paying off debt that has a 0% interest rate, two different lines of thinking come into play. Without having to worry about paying additional interest, you can instead put all your money toward paying down the principal. Alternatively, you can focus your attention on paying off other debts that may be accruing interest, such as a mortgage, car loan or credit card.
Which brings us back to a choice many borrowers had to make when federal student loans payments and their associated interest were put on hold as a result of the Covid-19 pandemic — whether to keep paying them off at a time when interest was reduced to 0% or put that money elsewhere.
For those who kept paying their federal student loans off throughout the moratorium, there is even better news than just the possibility of student loan forgiveness (which you must qualify for by meeting certain income thresholds): A specific clause on the Federal Student Aid website indicates that you can receive all of those funds back. Specifically, it 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.”
There aren’t any further details listed about it on the Federal Student Aid website except that interested parties should contact their loan servicers directly to process these refunds. A list of federal student loan servicers can be found here.
So far, it seems to be working. Kaitlyn Koterbski, a personal finance fellow at Fortune, described her personal experience of getting a refund this way, reporting that it took two phone calls and several hours on hold with her student loan servicer for her refund of nearly $3,000 to be processed. A number of tweets and TikTok videos have also featured borrowers sharing their stories about how they were able to get refunded for payments made since the freeze began in March 2020.
Here’s how it works:
Let’s say you had an $8,000 balance prior to the pandemic, and paid $3,000 off since Mar. 13, 2020, leaving you with a current balance of $5,000. If you ask for a refund from your servicer, your payments will be issued to you back in cash. So in this, you will receive $3,000. However, your overall student loan balance will go back up to $8,000.
After that, you would apply for student loan forgiveness. Assuming you’re under the income restriction and a non-Pell grant borrower, you will have $8,000 forgiven, leaving you with no student loan debt. From there, you can decide what to do with the $3,000 that was returned to you.
However, while some people have moved forward with requesting their refunds from their servicers, some experts are advising to wait until more details are released from the Department of Education to understand how pandemic-era student loan payments will affect overall balances and eligibility for student loan forgiveness.
What to do with your student loan refund
If you’re able to receive a refund — whether or not a huge chunk of your student loans are also being forgiven — it’s a great time to begin tackling other financial goals. Here are a few ways to get started.
Pay off high-interest debt
If you have any high-interest debt such as a credit card, use your refund to pay that balance off. It’s almost certain your credit card interest rate is higher than your student loans, so it’s mathematically the best idea to pay these balances off first.
Or, if you have a good to excellent credit score, you may consider applying for a 0% intro APR credit card and doing a balance transfer to one of these cards.
Boost your emergency fund
If you don’t already have three to six months worth of living expenses saved up in a high-yield savings account, that may be the best place to begin, as it would provide you with a financial cushion to fall back on in case of any unexpected expenses such as pricey home repairs or surprise medical bills — or if you were to suffer a sudden job loss.
The advantage of using a high-yield savings account is that you can earn more interest on your balance each month than you normally would through a traditional savings account. Here are two of our favorites to consider.
Invest for the future
If you haven’t prioritized investing for retirement, this windfall can help you to build up your net worth.
Let’s say you’ve paid $12,000 toward your student loans since the beginning of the pandemic. After you reach out to your loan servicer and your refund is processed, you could take that money, open a Roth IRA and invest in an S&P 500 index fund, which historically has returned about a 10% annualized average return over the past 30 years.
You could then fill your Roth IRA for 2022 and save the other half to fill your Roth IRA once the calendar turns to 2023.
Over the course of 30 years, that $12,000 you assumed was going to your student loans would end up growing to about $209,000 in tax-free retirement money if it continued to produce a 10% average return — if you were to contribute an additional $500 per month on top of that starting in 2024, you would end up with over $1 million.
If this sounds appealing to you, consider opening an investment account such as a Roth IRA with one of the following brokerages, or using one of the robo-advisors listed below to help you reach your financial goals.
Bottom line
For many borrowers, the windfall from having some of their student loans forgiven and receiving a refund for any payments made since March 2020 can be a life-altering financial event.
As you get your financial priorities in line, be sure that you give a specific purpose to the money you’re refunded and the monthly payments you would have been paying toward your loans. Otherwise, you may find yourself spending it on things that won’t be setting you up for a successful future.
