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.
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Student loan borrowers are starting to receive refunds
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.
What to do with your student loan refund
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:
SoFi Personal Loans
Annual Percentage Rate (APR)
8.99% to 25.81% when you sign up for autopay
Loan purpose
Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses
Loan amounts
$5,000 to $100,000
Terms
24 to 84 months
Credit needed
Good to excellent
Origination fee
No fees required
Early payoff penalty
None
Late fee
None
Terms apply.
Discover Personal Loans
Annual Percentage Rate (APR)
7.99% to 24.99%
Loan purpose
Debt consolidation, home improvement, wedding or vacation
Loan amounts
$2,500 to $40,000
Terms
36, 48, 60, 72 and 84 months
Credit needed
Good
Origination fee
None
Early payoff penalty
None
Late fee
$39
Terms apply.
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:
SoFi Student Loan Refinancing
Cost
No origination fees to refinance
Eligible loans
Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans
Loan types
Variable and fixed
Variable rates (APR)
5.38% - 9.99% (rates include a 0.25% autopay discount)
Fixed rates (APR)
5.24% - 9.99% (rates include a 0.25% autopay discount)
Loan terms
5, 7, 10, 15, 20 years
Loan amounts
From $5,000; over $10,000 for medical/dental residency loans
Minimum credit score
N/A
Minimum income
N/A
Allow for a co-signer
Yes
Terms apply.
Earnest Student Loan Refinancing
Cost
No origination fees to refinance
Eligible loans
Federal, private, graduate and undergraduate loans
Loan types
Variable and fixed
Variable rates (APR)
5.72% - 9.74% (rates include a 0.25% autopay discount)
Fixed rates (APR)
4.96% - 9.74% (rates include a 0.25% autopay discount)
Loan terms
Flexible terms anywhere between 5-20 years
Loan amounts
A minimum of $5,000, up to $500,000 (residents of California must request to refinance $10,000 or more)
Minimum credit score
650
Minimum income
No income requirement
Allow for a co-signer
No
Terms apply.
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 5.21% APR to 10.04% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.74% APR to 9.99% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.
Laurel Road Student Loan Refinancing
Cost
No origination fees to refinance
Eligible loans
Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency/fellowship loans, plus special pricing and reduced rates for health-care professionals (physicians, dentists, optometrists and physician assistants)
Loan types
Variable and fixed
Variable rates (APR)
From 2.50% (rate includes 0.25% autopay discount and assumes no linked Laurel Road Checking discount)
Fixed rates (APR)
From 3.99% (rate includes 0.25% autopay discount and assumes no linked Laurel Road Checking discount)
Loan terms
5, 7, 10, 15, 20 years (but also offers any term below 20 years, subject to underwriting criteria)
Loan amounts
For bachelor's degrees and higher, minimum $5,000; for eligible associate degrees in the health-care field, up to $50,000 in loans for non-ParentPlus refinance loans
Minimum credit score
N/A
Minimum income
N/A
Allow for a co-signer
Yes
Terms apply.
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:
Charles Schwab
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
Fees
Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
Bonus
None
Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account
Investment options
Stocks, bonds, mutual funds, CDs and ETFs
Educational resources
Extensive retirement planning tools
Terms apply.
Wealthfront
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
Fees
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
Bonus
None
Investment vehicles
Investment options
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
Educational resources
Offers free financial planning for college planning, retirement and homebuying
Terms apply.
Ally Invest®
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for Self-Directed Trading. $100 minimum for Robo Portfolios
Fees
Fees may vary depending on the investment vehicle selected. Self-Directed Trading has zero commission fees for stock, ETF, options trades; $0.50 per options contract. Robo Portfolios have zero management fees
Bonus
You may be eligible for up to $3,000 bonus cash when you open an Ally Invest Self-Directed account
Investment vehicles
Robo-advisor: Ally Invest Robo Portfolios IRA: Ally Invest Traditional, Roth and Rollover IRAs Brokerage and trading: Ally Invest Self-Directed Trading
Investment options
Stocks, bonds, ETFs, options, mutual funds, margin account and forex trading
Educational resources
Offers informational articles to help users improve their understanding of investment strategies and market trends
Terms apply.
Bottom line
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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