Student Loan Refunds Are Real, But You Might Not Be Eligible

Since President Biden announced broad student loan debt relief, there has been a lot of talk about student loan refunds, which surprisingly have been around for a little while.

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With all the talk about President Biden’s student loan debt cancellation, you may be hearing about other ways to potentially maximize your student loan relief. One idea involves requesting a refund of student loan payments made during the pandemic pause. The Department of Education has said that some borrowers may receive "automatic" student loan refunds, while others will not. And it is also important to know that not everyone is eligible for a student loan refund.

So, here’s a little information about how student loan refunds for payments made during the pandemic work—which hopefully can help you determine whether requesting a refund is right for you.

Who is Eligible for a Student Loan Refund?

As you may know, federal student loan payments have been on pause since March 2020 and the payment pause was just extended through December 31, 2022. As a result, millions of borrowers haven’t had to pay their regular student loan payments, or interest on those payments, for more than two years.

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However, despite the pause, some people chose to continue making payments on their student loans.

To offer relief for those borrowers, the federal government has said that if you have a qualifying direct federal student loan and made payments during the pandemic payment pause, you can request a refund for any student loan payment that was made—beginning March 13, 2020.

So, how long has the federal government been refunding student loan payments? The Federal government began offering student loan refunds about a year ago—long before President Biden’s recent announcement on broad student loan forgiveness.

And as you might have already guessed, payments made on private student loans aren’t eligible for refunds under this program.

How Student Loan Refunds Work

To request a refund for federal student loan payments made during the pandemic pause, you will probably have to contact your loan servicer. (Your servicer is the company that the Department of Education assigned to handle the billing and other services on your federal student loan.) They likely have information about student loan refunds on their website and should be able to help you determine whether your loan payments are eligible for refund.

When you contact your loan servicer, you may be asked to provide information about the payments that you made during the pandemic pause and the amount that you want refunded.

Once you request a student loan refund, there may be a wait before you receive your money. That's because loan servicers need to process refund requests through the Department of Education. That could reportedly take anywhere from six to twelve weeks for some servicers and borrowers, and 90 days for others.

Generally, though, if you are eligible for a refund, your payments can be refunded to you in the same way that you made them. For example, if you made your payments electronically, your refunds can usually be sent to the same bank account that you used to make the original payments. Additionally, the Department of Education has clarified that auto-debited payments are eligible to be refunded.

Some Student Loan Refunds Will Be Automatic

While some borrowers will need to contact their loan servicer for a refund, the Department of Education has announced that other borrowers will be able to have their refund automatically applied to their account balance.

If you made voluntary payments on your student loan during the pandemic payment pause and those payments brought your balance below $10,000 (or below $20,000 for Pell Grant recipients) the Department of Education says that you will receive a refund. That refunded amount will apply to your remaining balance. But there is an important note: to get the refund, you still must successfully apply for and receive debt relief under the Biden administration’s student loan debt relief plan.

As an example, let’s say that you paid $250 a month for a year during the pandemic payment pause for a total of $3,000. So, those payments took your balance from 10,000 to $7,000. The remaining $7,000 falls below the minimum $10,000 debt forgiveness amount, so the $3,000 would be automatically refunded.

There are some instances where the Department of Education has said some borrowers won’t be able to get an automatic student loan refund. For example, if you made payments during the payment pause that didn’t bring your balance under $10,000, or under $20,000 for Pell Grant recipients, then you can apply in October to have the loan forgiveness applied to your balance. But you would not receive a so-called “automatic” student loan refund.

Also, some of you may have paid off your loan in full during the pandemic pause. If you did, and you’re eligible for student loan debt forgiveness, you would likely have to first request a refund of the payments you made during the pandemic. Then, you would apply to have your debt forgiven.

The rules and guidance for student loan refunds can be complicated and are evolving. So, for more information on student loan refunds and whether they are automatically applied to your student loan balance visit the Federal Student Aid website.

Will You Pay Taxes on Your Student Loan Refund?

Normally, the IRS considers forgiven debts to be taxable income. So, that has been the cause of some confusion about student loans and taxes. But the White House has indicated that under the American Rescue Plan Act, which was enacted during the COVID-19 pandemic, student loan relief is not considered taxable income for federal income tax purposes through 2025. That means that for now, you shouldn’t be taxed on refunds of federal student loan payments made during the pandemic, or on cancelled amounts from federal student loan forgiveness.

A note on state taxes: As of now, there are some states that will still tax student loan forgiveness. Those states currently include Indiana, Mississippi, and North Carolina. Arkansas, Minnesota, and Wisconsin could also possibly tax student loan forgiveness. Stay tuned to any guidance or information that is made available on that issue in your state.

Should You Request a Student Loan Refund?

Since this refund program has been around for about a year, some borrowers have already completed the refund process, or are waiting for their funds to be refunded. But you might not have heard about this opportunity until now and may be wondering whether you should request a refund. (Some people hope that the combination of a student loan refund and the newly announced student loan forgiveness will help put more money in their pocket.)

Unfortunately, until the Department of Education releases more detailed guidance on how President Biden’s student loan forgiveness will work, it is hard to know exactly how your student loan refund and student loan forgiveness (if you’re eligible for both), will be calculated on your individual loan balance.

So, stay tuned and informed. More information should be coming soon from the Department of Education on how millions of student loan holders, like you, can possibly reduce or eliminate their loan balances.

In the meantime, for more information on President Biden’s student loan debt cancellation, see Biden’s Student Loan Forgiveness: What it Means for You and Up to $20,000 in Student Loan Cancellation is Here: But Will it Hurt Your Taxes?

Kelley R. Taylor
Tax Editor, Kiplinger.com