Prepare to resume your student loan payments in October of 2023.
It should come as no surprise that the US government wants your student loan refund back.
Student loan borrowers who received refunds of voluntary payments made during the interest-free payment pause are now required to cover payments and interest on their entire student loan balance—including the refunded amount—as bills resume in October of 2023.
Here’s what every borrower should understand.
- Refunds vs. Forgiveness — Refunds mean returned money paid towards a loan and can be reintegrated into loan balances. Forgiveness means canceling part or all of a loan.
- Preparation is Key — Proactively communicate with your loan servicer about dues and repayment options like lump sum payments or IDR plans.
- Understanding Forgiveness Routes — Programs like Income-Driven Repayment (IDR) and Public Service Loan Forgiveness (PSLF) provide options.
Who Received Refunds?
Only borrowers who actively sought out refunds received them. During the pandemic-induced payment pause, any payments made on federal student loans were eligible for a refund. However, these refunds are now being reintegrated into borrowers’ outstanding loan balances.
The federal student loan servicer sent out refund checks, but the Supreme Court declined President Biden’s student debt cancellation in June. So now, borrowers must repay their full student debt, including refunded amounts.
A quick note: Private student loans weren’t part of the forbearance, hence they did not qualify for payment refunds. Payments made on some FFEL Program or Perkins loans also missed the mark in terms of eligibility.
Is a Refund the Same as Forgiveness?
People often confuse refunds and loan forgiveness, but they serve different functions. A refund involves returning money previously paid towards a loan.
For example, borrowers who made payments during the auto-forbearance phase could request refunds. However, with the upcoming reinstatement of regular loan payments, the refunded amounts will be added back to the borrower’s loan balance.
On the other hand, forgiveness deals with the elimination or cancellation of a portion (or all) of a borrower’s loan. The White House’s 2022 announcement was regarding the cancellation (forgiveness) of federal student loan debt.
Biden’s Plan for Forgiveness
Many borrowers were hopeful when the Biden administration announced it would cancel federal student loans. Here’s an overview of what was proposed:
- Aimed to cancel up to $10,000 in federal student debt for each borrower. And up to $20,000 for those who had received a need-based Pell Grant.
- Sought to alleviate the financial strain on former students thus stimulating the economy by freeing up consumer spending.
The Aftermath of the Supreme Court’s Decision
When the Supreme Court struck down President Biden’s student debt cancellation in June, the effects were immediate. Here’s what happened:
- Immediate Repercussions for Borrowers — Since the cancellation was no longer happening, borrowers were now liable for their full student debt balance. This included amounts they had received as refunds during the payment pause.
- Reintegration of Refunded Amounts — The amounts were added back to the outstanding loan balances and regular loan payments resumed.
- Public Reaction — Some lauded the decision as prudent, others saw it as a blow to borrowers grappling with economic hardships made worse by the pandemic.
- Future of Loan Forgiveness — The ruling fueled uncertainty about future student loan forgiveness promises.
- Private Student Loans Remain Unchanged — Private student loans were never part of the broader federal discussions or the subsequent rulings. They continued to operate normally.
How Does this Impact Forgiveness Under ID, PSLF?
While this may feel like a setback, it may not be a total loss.
Maintaining open communication with your loan servicer, staying updated on policy changes, and adhering to the specific requirements of these programs is key.
Two popular paths toward this are Income-Driven Repayment (IDR) and Public Service Loan Forgiveness (PSLF). Here’s how refunds factor into these programs:
- Understanding the Basics — IDR plans peg monthly loan payments to a borrower’s income and family size. After 20 to 25 years of payments under these plans (the exact duration depends on the specific plan and when the borrower took out the loans), any remaining balance is forgiven.
- Refunds and IDR — If you received a refund during the payment pause, it won’t disqualify you for IDR forgiveness. The IDR account adjustment will reevaluate which months qualify for IDR forgiveness, including all months during the pandemic payment pause, irrespective of whether payments were made.
- The Road to Forgiveness — Borrowers nearing the 20 to 25-year mark may still see their loans erased, including refunded amounts.
Public Service Loan Forgiveness (PSLF)
- Understanding the Basics — PSLF is designed for borrowers working in qualifying public service jobs. After making 120 qualifying monthly payments, the remaining balance is forgiven.
- Refunds and PSLF — Refunded payments will still be counted towards the 120 required payments, as long as borrowers meet other criteria, such as being in a PSLF-qualifying job when the original payment was made. In simple terms, the refunded amount won’t derail your progress towards achieving PSLF.
Preparing to Pay Back Your Refund Step-by-Step
Here’s step-by-step guide a on preparing to pay back your refund:
- Locate Your Student Loan Servicer — Understand where your loan stands. Servicers might have changed during the forbearance period. Log into StudentAid.gov to find your current servicer and check their updated loan balance.
- Communicate — Reach out to your loan servicer. Clarify your due amount and payment schedules. You may need to reactivate auto-payments if you set them up before the forbearance.
- Lump Sum Payments — Repaying as a lump sum, especially before interest starts to accrue, may be a solid option if you manage it.
- Explore Income-Driven Repayment Plans — Income-driven repayment (IDR) plans are another option if a lump payment is unfeasible. IDR plans consider your disposable income to determine monthly payments.
- Stay Updated — It’s evident that the state of student loan repayment can change quickly. Check Americor’s blog regularly for the latest on student loans.
- Speak with a Professional — Speaking with a Debt Consultant, like one from Americor, can help you navigate the complexities of paying back your student loan refund.
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