Companies managing the Education Department’s $1.6 trillion portfolio of student loans said they are being inundated with refund requests from borrowers who made payments during the pandemic pause. The Education Department has offered to return money to people who continued to pay since the inception of the moratorium in March 2020, but the policy went largely unnoticed until last week.
Borrowers began inquiring about refunds after President Joe Biden said he would cancel up to $10,000 in federal student loan debt, and up to $20,000 for Pell Grant recipients, for people who earn less than $125,000 per year, or less than $250,000 for married couples. Among the queries: What if they paid off their loans during the pandemic? Would they still qualify for cancellation? How would that even work?
Like this: Say you paid off the $8,000 balance on your loan during the pandemic. You can request a refund of that money and then apply for debt relief to clear the ledger. That way, you get to keep your $8,000 and still have your loans canceled. That is, if you meet the eligibility criteria.
While most of the nearly 42 million people covered by the pause have not made payments since its inception, about 9 million borrowers in good standing kept sending money, according to the Education Department. Borrowers have one year to apply for a refund. The agency has confirmed that eligible people who paid off some or all of their debt in the last 2½ years could still qualify for cancellation if they meet the income threshold.
However, there is nothing on the Education Department website saying as much, which should give borrowers pause, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group representing companies who collect education debt payments.
There is no guidance on the Education Department website “about how refunds will work relative to forgiveness. And given the government is still building this plane after already taking off, I think waiting for official guidance is best,” he said. Buchanan said his members have received “a ton” of refund inquiries lately. Several student loan servicers pegged the number in the tens of thousands.
“The sudden renewed interest in these refunds is, in part, people believing in the student loan system again,” said Michael Pierce, executive director of the Student Borrower Protection Center. He said the nonprofit spoke with borrowers early in the pandemic who tried to submit written requests for a refund and were ignored. “I would hate for capacity issues at the servicers to make a fool out of everybody that is telling people they can trust this,” Pierce said.
Some payments made during the freeze were involuntary, the result of the department continuing to garnish the wages of defaulted borrowers early in the pandemic. Some borrowers, particularly those working toward public service loan forgiveness, kept paying out of distrust.
Others, like Gray and Lauren Cole, saw an opportunity to rid themselves of debt without paying interest. The couple in Gainesville, Georgia, spent 2020 and 2021 paying off the $40,000 in student loans Gray acquired while studying kinesiology and ministry at Mississippi College.
“We were pretty fortunate that even while we were on lockdown during COVID, we were still able to work,” said Lauren Cole, 32, a user experience designer. “We had already been working hard to pay off our debts and stayed committed.” When she learned of Biden’s cancellation plan, Lauren said she was happy for her friends who would benefit but certainly did not think she would be among them.
That changed after she spotted a tweet from the Student Borrower Protection Center encouraging people who made payments during the pause to request a refund. The nonprofit, which has advocated for debt cancellation, told borrowers to apply for a refund before applying for forgiveness.
Last Friday, the Coles called Gray’s servicer, and a representative said it would take six to 12 weeks to process the request and return $10,000 of the money they paid toward his debt. “It was a little shocking at first, especially how easy it was,” said Gray, an Army chaplain. “The woman just pulled up the account and said, ‘You are now cleared for the 10 grand to come back your way.’ We will just try to pay it forward the best way we can with our community.”