Automatic Student Loan Payment Refunds Coming to Millions

• Borrowers haven't needed to make payments on their federal loans since March 2020.
• Those who chose to make payments since then can have some or all of those payments refunded.
• Those who fully paid off their loan during the moratorium must contact their loan servicer instead.

Borrowers who continued to pay their student loans during the pandemic payment pause may have funds automatically refunded through President Joe Biden's debt cancellation program.

The Department of Education (ED) updated its guide to the debt forgiveness plan to include new information about automatic refunds for borrowers who qualify for forgiveness and paid off part of their loan since March 2020. Qualifying borrowers may soon have money deposited into their accounts if part of the loan forgiveness would have applied to their loan had they not paid part of it since the start of the pause.

Previously, the department stated borrowers would have to contact their loan servicer to manually request a refund of funds before forgiveness.

“This move by [ED] is a positive and necessary step for fulfilling President Biden's historic promise to cancel student debt.”
—Mike Pierce, executive director of the Student Borrower Protection Center

"This move by [ED] is a positive and necessary step for fulfilling President Biden's historic promise to cancel student debt," Mike Pierce, executive director of the Student Borrower Protection Center (SBPC), said in a statement. "Automatically providing these refunds will ensure that borrowers are made whole if they made payments during the payment pause without having to rely on the whims of abusive and ineffective servicers to access this relief."

Examples of Automatic Relief

To help better explain how automatic refunds work, let's run through some examples.

Borrower A makes less than $125,000 per year and did not receive a Pell Grant, making them eligible for up to $10,000 in student debt cancellation.

Before the pandemic pause, Borrower A had a loan balance of $15,000. From March 2020 until now, they made $8,000 worth of payments on those loans, bringing the balance down to $7,000.

Under ED's updated guidance, Borrow A only needs to apply for debt forgiveness when the application is released in October. Doing so will eliminate the remaining $7,000 balance on their loans. But because that borrower would have qualified for up to $10,000 in forgiveness, ED will refund $3,000 back to Borrower A to make up the difference.

Now let's look at Borrower B, who also makes less than $125,000 per year and did not receive a Pell Grant, making them eligible for $10,000 in forgiveness.

Borrower B owed $25,000 prior to the pandemic payment pause. They made $11,000 worth of payments during the pause, bringing their remaining balance to $14,000.

Because Borrower B is only eligible for up to $10,000 in cancellation, their balance will be brought down to $4,000. They will not have any payments refunded back to them automatically. They can contact their servicer manually if they wish to have any of the $11,000 they paid during the pause refunded, but that would be aside from the debt forgiveness plan.

Lastly, Borrower C also qualifies for $10,000 in forgiveness.

This borrower had $5,000 in federal student loans before the pandemic pause. Borrower C paid $4,000 toward that balance during the pause, leaving them with a balance of $1,000 today.

Through the automatic refund program, if Borrower C fills out the application, they will have the $1,000 forgiven. They will also have the $4,000 they paid during the pause refunded and automatically forgiven simultaneously, eliminating all their debt that remained at the start of March 2020.

For Those With No Remaining Debt

According to an analysis from SBPC, approximately 9.1 million federal student loan borrowers made at least one payment between April 2020 and March 2022. This would qualify many of them for the automatic refunds outlined above.

However, 1.9 million of those borrowers completely paid off their debt.

Those borrowers will have to jump through some hoops to see refunds and forgiveness.

Because they have no remaining federal debt, they won't be eligible for relief through the application since there is nothing to forgive. These borrowers must first contact their loan servicer to receive a refund of their payments and have their balances restored. Once that balance is restored, they can apply for debt forgiveness through Biden's relief program.