Financial basis

Why You Better Not Claim Your Pandemic Student Loan Repayment

  • Biden’s student loan forgiveness plan allows borrowers to get cash refunds for payments made during the pandemic.
  • But some borrowers had better not seek repayment, says financial planner Travis Sholin.
  • That said, it might be a good idea to use the repayment to pay off high-interest debt.

In addition to giving $10,000 to $20,000 in student loan forgiveness to each federal borrower, President Biden’s relief plan also allows borrowers to get refunds for any payments made during the pandemic.

According to the Federal Student Aid website, all you have to do is contact your loan officer to get your refund, but it’s not as easy as it sounds.

Although full refund details are not yet available online, Insider has confirmed with MOHELA and Nelnet services that the value of your refund can be added to your main balance.

For example, if you get a refund of $3,000 and you have a student loan balance of $15,000, your balance will increase to $18,000 after you receive your refund – this is why the student loan refund might not not be an advantage for all borrowers.

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It may not be wise to ask some borrowers for student loan repayment

Financial planner Travis Sholin of Keystone Financial says some borrowers are better off leaving that money alone. “I think if you’ve already made the payments, then let it be,” he told Insider.

Prior to the pandemic-related payment pause, only a portion of your payment was actually allocated to the principal balance of the loan, while the rest was devoted to accrued interest, unpaid interest that is added to your principal balance at the end of the month. Interest capitalized on student loans accrues daily, and this is the reason why student loans take so long to repay.

However, during the pandemic payment pause, 100% of payments were made to the loan principal balance. Sholin says, “At this point, you’ve decreased your capital without earning interest, so you’ve decreased it more than you normally would.”

You should only apply for student loan repayment to pay off high-interest debt

If you’ve paid off all of your student loans, there’s no harm in asking your servicer for a refund. If you meet the income requirements for the rebate and your balance will remain below $10,000 after receiving your refund, or below $20,000 if you are a Pell Grant recipient, there is also no trouble receiving your refund.

However, Sholin says there are special circumstances where getting your money back and increasing your principal balance can be helpful.

“Let’s say someone has $10,000 in credit card debt that they absolutely can’t pay off. If your credit card interest rate is 20% while your student loan interest rate is 5%, for example, Sholin says, “Using the repayment to pay off some of that card debt credit could be beneficial.”

Following this example: A 20% interest rate on a $1,000 debt will earn $2,695.97 in compound monthly interest over five years, excluding late fees, if you don’t make any payments. On the other hand, the same $1,000 debt with 5% daily compounded interest will earn $1,284 in interest in five years.

Sholin said of the refund: “It’s on a case-by-case basis, and I’ve seen it all. But don’t just accept the shiny promise of money now, because you’ll have to pay it back later – with interest. . .”