It’s been an up-and-down year for many student loan borrowers. Even if you could afford to keep making regular payments after the federal Covid-19 student loan forbearance period started last March, perhaps your financial situation has since changed and you would benefit from a refund of that money.
If you now find yourself strapped for cash, you can request a refund on all payments made during that period. Here’s how to do it.
How to Get a Refund
When the CARES Act passed in March 2020, it immediately suspended student loan payments for federal borrowers. Since then, the administrative forbearance period has been extended twice and is now set to end on September 30, 2021.
Borrowers have the option to keep making payments during the administrative forbearance period. Many have taken advantage of the 0% interest rate the government set its loans to, which means 100% of the payments they’re making now go toward paying down each loan’s principal balance.
However, borrowers who now need money can request a refund of any federal student loan payments made on or after March 13, 2020. If you made any extra payments before that day, you will not be able to get a refund.
The process is fairly simple. First, write down how many payments you’ve made during the forbearance period, the date that the payment went through and the amount of each payment. You may have sent payments to several different loan servicers if you have more than one loan. Here’s a comprehensive list of all federal loan servicers.
Next, visit the loan servicer website and click on its Covid-19 page, which should have information on how to ask for a refund. Most servicers will require that you call them to personally request a refund.
When you do, specify which months you want to be refunded for. Ask them how long it will take for the refund to be processed. It should be posted to the bank account that you made the payment from.
Then, set a reminder on your calendar or phone to make sure the refund has gone through. Refunds can take almost a month to process in some cases, so don’t worry if it’s been a few weeks. Don’t be shy about contacting the loan servicer if your refund still hasn’t shown up after that.
What to Do With a Refund
Once your refund has been posted to your bank account, it’s important to be strategic in how you use it. Here are some options:
Add to Your Emergency Fund
As the Covid-19 pandemic demonstrated, millions of Americans don’t have enough of an emergency fund to cover essential expenses if they lose their jobs.
If you have less than six months’ worth of expenses saved, add the refund to your rainy day fund. This money should be used only for surprises like a sudden trip to the ER or travel expenses for a funeral.
It’s a smart idea to keep an emergency fund in a high-yield savings account, which pays more interest than a traditional savings account.
Pay Past-due Bills
If you let some bills lapse while you were unemployed, use the refund to catch up. Call the providers and ask them to reduce or remove any late fees or other extra charges.
While you’re on the phone, ask them if there’s a discount plan you can be put on. Many energy companies and internet providers offer more affordable options for low-income customers. You may have to provide a pay stub or proof of unemployment to be eligible, but you could save hundreds by signing up.
Eliminate High-interest Debt
If you already have a fully-stocked emergency fund, the next best option is to use your refund to pay down high-interest debt like credit cards, payday loans and title loans. In general, if the interest rate is in the double digits, you should pay it off quickly.
If you have multiple high-interest loans or credit cards, write down the total balance, interest rate and monthly payment. Sort the loans or credit cards by the remaining balance and the overall interest rate.
There are two highly effective strategies you can use to apply the refund: the debt snowball method and the debt avalanche method.
The debt snowball method involves paying off the lowest balance first. Once you pay off the smallest balance, you can add that monthly payment to the next smallest balance. With the avalanche method, you prioritize the loans with the highest interest rate first.
Research published in 2016 in the Harvard Business Review found that borrowers who utilize the snowball method pay off their debt faster than those who use the debt avalanche method. The idea is that paying off individual debts faster helps borrowers stay motivated to keep going.
If motivation isn’t an issue, then the debt avalanche method might be preferable because you’ll save more on interest. Choose the method that appeals to you and put your refund toward that loan.
Pay for Necessary Repairs
If you’ve delayed an oil change or a plumbing repair because of your financial situation, use the refund to cover those expenses. The longer you wait to take care of your car or house, the more expensive it will be to fix.
Pay for Healthcare
If you put off going to the doctor during the pandemic and have a lingering issue, put the refund toward your healthcare expenses. You can even get a tax break if you put the money in your health savings account (HSA) first.
Only consumers with a high-deductible health plan (HDHP) can open an HSA, so double-check what coverage you have before opening one.
HSA contributions are tax-deductible and can be used for doctor’s visits, lab work, imaging services, surgery, prescriptions and more. The CARES Act expanded HSA eligibility, so you can now buy menstrual products and over-the-counter medications with your HSA card.
Buy a Life Insurance Policy
Buying life insurance has become a more urgent consideration for many during the pandemic, but consumers may avoid it because of cost.
According to Policygenius, the average cost for a 20-year $500,000 term life insurance policy is about $29 a month for a 35-year-old man and $24 a month for a 35-year-old woman. If you get a $300 refund, you could pay for about a year’s worth of premiums.
Options for Private Loan Borrowers
While the government is only offering refunds for federal student loans, borrowers with private loans still have other options to reduce their payments.
Start by contacting the lender and asking if it offers a forbearance program. Many private lenders are being more flexible with borrowers because of the pandemic, providing extended forbearance programs for as long as two years. You may have to apply for the program every month or so and provide proof of economic hardship, like unemployment benefits. Again, this depends on your particular loan servicer.
Be aware that interest will still accrue during this time and will likely be added to the total principal when the forbearance period is over. This will likely increase your monthly payments and the total amount of interest. As soon as you can afford to make regular payments again, start doing so to avoid adding more interest to your loan balance.
If you qualify based on your credit score and income, you could also opt to refinance your private student loan to a longer loan term. This will reduce your monthly payments and free up some cash flow. However, you usually aren’t eligible for forbearance until you’ve made a certain number of on-time payments, so know that you may not have the option to put your loans into forbearance right away after refinancing.