Borrowers with federal student loans have received welcome relief from payments and interest charges since March 2020. That’s when the federal government announced a pause on payments and interest rates. 0% fixed interest rates on most federal student loans through their Covid-19 relief. plan.
This relief has been extended several times since then, although it is currently scheduled to expire on May 1, 2022.
What does this mean for borrowers with federal student loans? For those who have had their loans deferred all the time, this means they will have to pick up where they left off with their payments in May this year. Borrowers who skipped payments will technically be two years behind the repayment plan they were on before the pandemic hit, but no further penalties will apply.
For those who continued to make payments throughout the deferment period, on the other hand, this means they can continue to make payments as they normally would.
That said, the US Department of Education is also allowing student borrowers to get a refund on all payments they have made for their federal student loans since March 2020. Although this fact has not been widely publicized, you can read the basics on the studentaid.gov website.
Specifically, here is what the page says:
“You can get a refund for any payment (including direct debit payments) you make during the payment break (starting March 13, 2020). Contact your loan officer to request a refund of your payment.”
This may be your last chance to get a refund on the student loan payments you made during the pandemic, but should you take advantage of this option? According to experts, it depends on your particular situation and whether you really need the money.
When does it make sense to get your federal student loan payments refunded?
If you’ve been tempted to get a refund on the student loan payments you’ve made during the pandemic, you’re certainly not alone. It is estimated that you would actually be $1,750 ahead financially if you DOESN’T make additional payments on your student loans – so you can kick yourself.
With inflation at 40-year highs and housing costs growing at a record pace, it might be a good idea to access the money you paid for and use it for other purposes, even if that end is only to meet regular bills.
If you’re struggling financially, that’s another reason to consider getting a refund on the payments you’ve made all along. By getting your money back, you can essentially pick up where you started with your student loans in May 2022. However, you will have the added benefit of having your money in your own bank account, where you can use it to stay at float with your finances until your situation improves.
Financial Advisor Evon Mendrin of Wealth Advisors Optometry says another big reason to opt for a refund is if the borrower realizes they are eligible for federal loan forgiveness. This could be a Public Service Loan Forgiveness (PSLF) or forgiveness through an income-driven repayment plan, he says.
Mendrin points out that months during the federal loan pause already count as payments toward forgiveness, even if borrowers weren’t actually making any.
“The whole point of forgiveness is to pay as little as possible and get as much forgiveness as possible, so there’s no reason to make payments while on hiatus,” he says.
Mendrin also says it can be a good idea to get a refund in order to tackle “bad” or unproductive debt instead. If you have high-interest credit card debt, for example, using student loan repayments to pay it off could be a boon to your finances. After all, the average credit card interest rate is currently over 16%, while federal student loans will charge rates ranging from 3.74% to 6.28% in 2022.
According to Joseph Orsolini of University aid plannersa final reason to get a refund of student loan payments is if your state offers tax relief for contributing to a 529 plan. Under the SECURE Act, you can now use 529 plan funds (up to $10,000) to pay off student loans, he said.
“By getting a refund and then executing payments through the 529 plan first, you can take advantage of this state tax relief,” says Orsolini, adding that the money only needs to be in the account for five business days. to be eligible.
Why you shouldn’t get a refund
If you are looking for reasons for not getting a refund on your student loan payments, the most important is to believe that student loan debt do not be canceled in the near future. After all, you wouldn’t want to let the government keep that money if the student loan debt is forgiven in a few years. Unfortunately, it seems highly unlikely that student loan debt will ever be forgiven, especially not on a large scale.
If you made payments during the Covid-19 relief period, you’ve moved your repayment date much further than borrowers who didn’t. It’s been two years since federal student loan payments were originally suspended and interest rates were set at 0%, so getting a refund now would essentially “undo” any progress you’ve made during that time.
Worse still, you might start paying interest on debts you’ve already paid off once.
According to Melanie Hanson, editor of EDI refinancingit is the financial equivalent of a loan for the amount of the installments repaid at the rate you pay on your student loans.
“When deciding if getting those refunds is worth it, that’s the metric you need to measure yourself against,” she says.
You can get a refund on payments made on your federal student loans since March 2020, but should you? This is a question that 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 your bills or taking on more debt? Or would you rather have peace of mind knowing that your student loans will be repaid according to your original plan.
If you don’t need your student loan money at all, you should probably leave your payments where they are.