Student loan borrowers are receiving refunds for pandemic-era payments — here's what you should do with yours

Federal student loan borrowers rejoiced last month when the Biden administration announced its student loan forgiveness program, providing up to $10,000 in federal loan forgiveness — and up to $20,000 for Pell Grant recipients — as long as they met certain income requirements.

Shortly after the announcement, the news broke that the borrowers who had continued to pay off their loans throughout the student loan moratorium, which began Mar. 13, 2020, could receive a refund for their pandemic-era payments.

Now that some borrowers are starting to see those refunds roll in, many are wondering what they should do next. Below, Select breaks down everything student loan borrowers need to know, and how they can make the best use of this unexpected addition to their bank accounts.

In the Student Loans channel on Reddit, borrowers like Kyndra Monroe and Abbey Swanson have been posting about receiving the student loan refunds they requested.

When Monroe first heard the news about the refunds, she immediately reached out to her student loan servicer and requested a refund for the $5,900 in federal student loans she had paid in full in December 2020. The refund was requested on Aug. 27 and received in full via check on Sept. 15.

Monroe said she did this strategically — now that her remaining student loan balance is $5,900, she will apply for federal student loan forgiveness, which will essentially wipe it out.

If everything goes according to plan, Monroe anticipates using the refunded money to pay off another loan she had to take out to fix a broken pipe in her home, get ahead on property taxes and take her family on a trip to meet recently-discovered relatives.

Another Reddit poster, Swanson, received a refund check for the $20,000 worth of payments she'd made during the student loan moratorium, saying she was able to pay off her loan in full during the pandemic because of the interest rate freeze.

Swanson said she called her loan servicer to ask for the refund and received it three weeks later. With her balance back at $20,000, she said she will wait to apply for $10,000 in student loan forgiveness. Once that is processed, she plans to use her refund to pay off the remaining balance.

With an extra $10,000 in her account, Swanson and her husband plan to use the refund for a down payment on a home or invest it for the future. "Either way, it's nice to have options," she tells Select.

While an unexpected windfall of cash is nice to have, it's critical to have a plan when it comes to spending the funds. Without this, it's easy to find yourself tempted to spend it on other frivolous purchases. Here are a few ways to ensure that student loan refund money keeps working for you.

Pay off high-interest debt

High-interest debt is the weight that's holding you down from advancing your path to growing wealth, so do your best to either consolidate or eliminate as much of it as you can.

Take your student loan refund and throw it straight at that debt — or refinance your debt into a personal loan that has a lower interest rate. If a personal loan interests you, consider checking out the interest rates available to you with a few of our favorite providers:

Consider refinancing your loans

If you will still have remaining student loans after the government forgiveness is applied, or if you have outstanding private student loans, you may consider refinancing your loans.

For example, let's say you have $35,000 in federal student loans and are eligible for $10,000 in forgiveness. Once the forgiveness is approved and applied, refinancing the remaining $25,000 with a private student loan lender may benefit you with a lower interest rate.

Or, if you currently have private student loans, you can also refinance them again at a lower interest rate. In fact, I've refinanced my student loans six times to get better terms and interest rates.

However, it's important to remember that once you refinance into a private student loan, you will forfeit all federal student loan protections or any future forgiveness. But with a more competitive interest rate and more streamlined customer service, you may be in a better position to pay off your loans than remaining with federal loans. It may be wise to wait to refinance until the federal student loan payment freeze ends in Jan. 2023.

So if you're interested in refinancing your student loans, consider taking a look at current interest rates with some of our favorite student loan providers:

Invest for the future

If you have all your high-interest debt taken care of, along with putting some money into an emergency fund, you may also want to consider investing your money for the future.

The stock market has been a shaky place to invest this year, especially with recent days shedding trillions of dollars in value. That said, history shows that investors who stay the course and don't try to predict the market have a much better chance of coming out on top.

As an example, the S&P 500 index is down nearly 20% so far this year, but compared with the last five years, it's up almost 54%. So, if you have a long horizon before the end of your working years, investing for retirement with your student loan refund can prove to be a solid strategy.

To get started, consider opening up a Roth IRA retirement account. If your refund is at least $6,000, you can fill the account to its yearly maximum — and that $6,000 compounded over 30 years at a modest 7% rate of return would turn into more than $45,000 of tax-free money.

Here's a look at some of our favorite IRA accounts:

This federal student loan refund provides an excellent way to get back some of the money you've been paying toward your student loans. Keep in mind, however, that the student loan forgiveness initiative is not considered to be completely set in stone, as there are reports of Republican legislators bringing lawsuits to challenge its legality.

For now, though, it's wise to reach out to your student loan servicer, request your refund if you continued to pay since March 13, 2020, and regularly check to see when the application for student loan forgiveness opens — once that happens, be sure to apply if you qualify.

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