What’s a student loan refund and how do you get one?


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 A student loan refund gives borrowers access to surplus funds from their private loans to use for qualified education expenses. (Shutterstock)

A student loan refund works a lot differently than the word “refund” might imply. A private student loan refund can occur if you use loan funds to cover education expenses that aren’t directly billed to your school — like textbooks or rent for off-campus housing. 

While you’re allowed to use your student loans to cover these expenses, taking out more in private loans than you need to pay the school directly can lead to an outstanding credit on your account. Generally, you can get this amount refunded, which you can then use to cover other expenses. 

That said, you’ll still need to repay this refunded amount. 

Here’s what to know about student loan refunds, how long it takes to get one, and whether or not you can get a refund from federal student loan payments. 

If you’re planning to use a student loan refund to help cover education expenses but still need to fill in the gaps, visit Credible to see your prequalified private student loan rates.

What is a student loan refund?

When you take out a private student loan to help pay for college, the lender will send the money directly to your school. Your college or university will put the funds toward your tuition and on-campus room and board. If you borrowed more than you need to pay for direct college costs, any remaining funds can be disbursed to you as a student loan refund.

Even though the name student loan refund may sound like “found money” — like a tax refund — these funds aren’t free. You’re expected to use them to pay for education expenses not billed directly by your school. You can use private student loan funds to help cover the costs of living and attending school, such as rent, gas, or school supplies. 

But even though it’s called a refund, you’ll still need to pay that money back (with interest) to the lender. 

It’s a good idea to borrow only as much as you need to cover your education expenses — and to understand what your payment will look like when it’s time to repay your loan. Credible’s student loan calculator can help you estimate your monthly student loan payment.

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How do you request a refund?

Most schools automatically issue student loan refunds, and you don’t have to do anything to get them. That said, the process can work differently at each school, so double-check with your school’s financial aid department to see if you need to take any action to receive your student loan refund.

Do you get the refund credited directly to your bank account? 

Whether or not the refund will be credited directly to your bank account also depends on the specific college or university you attend. Some schools will issue a direct deposit and others will mail a check or require you to pick up the refund in person.

How long does it take to get a refund?

Again, this varies. You can generally expect a refund to be processed within 14 business days after your school account is credited. The timeline can be faster or shorter depending on the school, the time of year, and how many refunds the school needs to issue. 

If you’re in a rush to receive that refund, you can see if your school will allow an advance on the student loan refund. With an advance, you can get the refund amount before it actually shows on your account. 

Credible makes it easy to compare private student loan rates from various lenders, and it won’t affect your credit.

What is federal student loan discharge?

Student loan refunds apply to private student loans and it’s easy to get them confused with federal student loan discharge (which only applies to federal student loans). In practice, federal student loan discharge acts more like a true refund than student loan refunds do. 

When you qualify for a federal student loan discharge, you won’t be required to continue to make payments on part of or all your federal loans.  

Federal student loan discharge is only available under certain circumstances: 

  • Your school closes while you’re enrolled or soon after you withdraw.
  • You have Perkins loans and work in a qualifying education job.
  • You become totally and permanently disabled.
  • You pass away.
  • You took out loans to attend a school and the school did something wrong, or failed to do something related to your loan or the educational services you paid for with the loan. This is called borrower defense to repayment.
  • Your school falsely certified your eligibility for a federal student loan.
  • Someone else fraudulently took out student loans in your name.
  • You withdrew from school and the school didn’t return the unused portion of your loan to your loan servicer. This type of discharge is known as unpaid refund discharge.

Unpaid refund discharge can occur if you have Direct Loans or FFEL Program loans. If you withdrew from school and the school didn’t return the unused loan funds to the loan servicer as required, then you may qualify for a discharge of the amount your school failed to return. 

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How do you apply for an unpaid refund discharge?

The process of applying for an unpaid refund discharge differs based on whether the school you attended is still open. 

  • If the school is still open, you can contact its payment department and attempt to resolve the issue before you ever apply for an unpaid refund discharge. If you can’t work it out, you should contact your federal loan servicer on next steps for applying for an unpaid refund discharge.
  • If the school has closed, you need to determine if you’re actually eligible for an unpaid refund discharge or if a closed school discharge would make more sense. Again, you’ll contact your federal loan servicer for more information about how to proceed.

If you aren’t sure who your loan servicer is for your federal student loans, you can log in to your StudentAid.gov account.  

How much of your loan will be discharged if you’re approved for a loan discharge?

How much you’ll still owe on your federal student loans after a discharge depends on whether the full amount or only a partial amount of the loans are discharged. 

If the full amount is discharged, you won’t make any more payments on your federal student loans. If only part of your loans are discharged, you’ll only need to make payments on the remaining balance that didn’t qualify for discharge.

It may be possible to have federal student loans discharged in bankruptcy, but the process is rigorous. You’ll need to go through bankruptcy court and prove that repaying your federal student loans would cause undue financial hardship.

Can you get a refund from federal student loan payments?

It’s not possible to get a student loan refund for federal student loans, but this isn’t as bad as it sounds. 

Remember, a student loan refund isn’t an actual refund. A student loan refund occurs when a school receives more funds than necessary from a private lender and “refunds” them to the student to use for education-related expenses not directly payable to the school. You’ll have to repay those funds, just as you’ll repay the amount that went toward your tuition and on-campus room and board.

If you’re struggling to repay your federal student loans, you have options. You may qualify for forbearance, deferment, or an income-driven repayment plan to get some relief. You can also consider refinancing your student loans to save on interest or make repaying your student loan debt more manageable. 

Here’s how these options differ. 

Forbearance

Forbearance allows you to either temporarily postpone or reduce your federal student loan payments. When a loan is in forbearance, interest will continue to accrue on the loan balance. You can choose to pay this interest even when the loan is in forbearance, or wait until you finish forbearance. 

It’s possible to request forbearance under a few different circumstances. If you can’t make your scheduled student loan payments for a temporary amount of time because of financial difficulties, medical expenses, change in employment, or other reasons acceptable to your loan servicer, you may qualify for forbearance.  

Deferment

Deferment works similarly to forbearance but has an added perk. Like forbearance, you can temporarily postpone or reduce your federal student loan payments with deferment. But interest won’t accrue on your loan balance while your federal student loan or loans are in deferment. 

Reasons you can qualify for deferment are quite varied and include, but aren’t limited to:

  • Undergoing cancer treatment
  • Experiencing economic hardship
  • Enrolling in an approved graduate fellowship program
  • Being an active-duty service member

Income-driven repayment plans

The Department of Education offers four income-driven repayment plans that use your income and family size to determine an affordable monthly student loan payment:

  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Based Repayment
  • Income-Contingent Repayment

Each plan uses a percentage of your discretionary income to determine your monthly payment. Depending on your income and family size, it’s possible to have your monthly payment set as low as zero. 

FEDERAL STUDENT LOAN REPAYMENT PLANS: KNOW YOUR OPTIONS

Refinance your student loans to get a lower rate

If you’re struggling to manage your student loan debt, refinancing may help make your situation more manageable. 

When you refinance student loan debt, you’re essentially taking out a new private student loan to pay off your original student loan or loans. You can refinance private or federal student loans into a new private loan.

Keep in mind that refinancing federal student loans into a private student loan means you’ll lose access to important benefits like income-driven repayment plans, deferment, and student loan forgiveness programs. 

One of the main attractions of refinancing student loans is the possibility of obtaining a lower interest rate. If your credit has improved since you first took out student loans, you may be able to refinance into a lower interest rate. This can result in lower monthly payments (as long as you don’t drastically change your loan term) and can help you save more money over the life of the loan. If you have multiple student loans, refinancing them into just one loan can also make them simpler to manage.

You can compare private student loan rates from various lenders with Credible, and it only takes a few minutes.