The value of your refund gets added back to your principal balance.
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Biden’s student-loan forgiveness plan lets borrowers get a cash refund for payments made during the pandemic.
But some borrowers are better off not asking for the refund, says financial planner Travis Sholin.
That said, it might be a good idea to use the refund to pay off high-interest debt.
Besides giving $10,000 to $20,000 in student-loan forgiveness to each federal borrower, President Biden’s relief plan also allows borrowers to get a refund for any payments made during the pandemic.
According to the Federal Student Aid website, all you have to do is contact your loan servicer to get your refund, but it’s not as simple as it seems.
While full details of the refund aren’t available online yet, Insider confirmed with servicers MOHELA and Nelnet that the value of your refund can be added back to your principal balance.
For example, if you get a refund for $3,000 and you have a student loan balance of $15,000, your balance will go up to $18,000 after you receive your refund — which is why the student loan refund might not be a benefit to all borrowers.
It might not be wise to take a student loan refund for some borrowers
Financial planner Travis Sholin at Keystone Financial says some borrowers are better off leaving that money alone. “I think if you’ve already made the payments, then just leave that be,” he tells Insider.
Before the pandemic payment pause, only a portion of your payment actually went toward the principal balance of the loan while the rest went to capitalized interest, unpaid interest that is added to your principal balance at the end of the month. Capitalized interest on student loans accrues daily, and it’s the reason student loans take so long to pay off.
However, during the pandemic payment pause, 100% of payments went toward the principal balance of the loan. Sholin says, “At this point, you’ve decreased your principal without interest accruing, so you decreased it more than you normally would have.”
You should only ask for the student loan refund to pay off high-interest debt
If you’ve paid off your student loans in full, there’s no harm in asking for a refund from your servicer. If you meet the income requirements for forgiveness and your balance will remain under $10,000 after receiving your refund, or under $20,000 if you’re a Pell Grant recipient, there’s no harm in receiving your refund, either.
However, Sholin says there are special circumstances where getting your refund and increasing your principal balance may be helpful.
“Let’s say someone has $10,000 in credit card debt that they absolutely cannot pay off.” If your credit card interest rate is 20% while your student loan interest rate is 5%, for example, Sholin says, “Using the refund to pay off some of that credit card debt might be beneficial.”
Following that example through: A 20% interest rate on a $1,000 debt will accrue $2,695.97 in monthly compounding interest in five years, excluding late fees, if you don’t make any payments. On the other hand, the same $1,000 debt with 5% daily capitalized interest will accrue $1,284 in interest in five years.
Sholin says of the refund, “It’s a case-by-case basis, and I’ve seen it all. But don’t just take the shiny promise of cash now, because you’ll have to pay it back later — with interest.”