Last week’s bombshell announcement on expanded Public Service Loan Forgiveness was life-changing news for many borrowers. Borrowers who had FFEL and Perkins loans may now qualify for forgiveness. Those who were on the wrong repayment plan will also benefit.
The cherry on top of this great news is that many borrowers will receive refunds for previous payments.
For many years, advocates have been calling for PSLF changes to help borrowers who had issues with repayment plan or loan eligibility. Refunding prior payments is a surprise.
While these refunds are great news, several significant exceptions might prevent borrowers from collecting a refund check.
How Borrowers Who Qualify Under the Expanded Public Service Loan Forgiveness Get Refunds
To qualify for Public Service Loan Forgiveness, borrowers must make a total of 120 certified payments.
The recent changes mean that many borrowers will see a dramatic increase in their number of certified payments. Under the revised criteria, some borrowers will have qualified for PSLF many years ago.
Those who made more than 120 payments will receive a refund for the extra payments. The Department of Education has not released exact details on the refund procedure. However, if the refunds work like the Covid-19 refund requests, the refunds will be issued via the original payment method.
If you think there is even a chance that you qualify for a refund, I’d recommend calling your servicer to discuss your options for the refund. You don’t want them to mail a refund check to an old address.
Sherpa Thoughts: Why issue refunds on prior payments?
These refunds are likely an acknowledgment that the government recognizes that borrowers should have already been given forgiveness and that it was wrong to continue to collect payments.
Additionally, government attorneys may have concluded that refunds were necessary to avoid losing a lawsuit against former borrowers.
Exception: Borrowers Who Already Earned PSLF
Some borrowers consolidated their FFEL or Perkins loans many years ago. They may have already qualified for PSLF and had their loans discharged.
If this situation applies to you, there is no refund available for previous payments.
The only borrowers eligible for a refund are those who newly qualify for PSLF under the revised rules.
Exception: Payment Made Before Consolidation
Another major exception is that refunds will only be issued for payments made towards federal direct loans. This means that borrowers cannot get a refund for payments made towards FFEL or Perkins loans.
An example is the best way to explain this exception.
Suppose you made 60 payments towards an FFEL loan and then realized that it was not eligible for PSLF. At that point, you consolidated your FFEL loan into a federal direct loan so that you could eventually qualify for PSLF. Post consolidation, you made a total of 80 payments.
Under the expanded eligibility, the original 60 payments now count towards PSLF. Thus, you have made a total of 140 PSLF payments. Because you made the 20 extra payments towards a direct loan, they qualify for a refund.
However, if you didn’t consolidate and made all 140 payments towards the FFEL loan, you can still qualify for PSLF, but a refund isn’t available.
Exception: Parent PLUS Loans
A final exception to the refund policy is Parent PLUS loans.
Unfortuantely for many Parent PLUS borrowers, the news here is especially bleak.
To the surprise of many, the Department of Education did not include parent PLUS loans in the expanded PSLF rules. Parent PLUS borrowers can still consolidate to gain PSLF eligibility, but unlike FFEL and Perkins loans, prior payments towards a Parent PLUS loan won’t count.
Suggestions for Borrowers Hoping for a Refund
If there is even a chance that you qualify for a refund, I’d suggest the following steps:
- Update your contact information. If your servicer issues a check, make sure it goes to the right place.
- Send in updated Employer Certification Forms. Many borrowers didn’t send in an ECF for payments made towards FFEL loans because they knew the loans were not eligible. If you have old payments that are now eligible, make sure your public service is documented during that time.
- Make copies of your payment history and all other loan documents. This step shouldn’t be necessary, but it might come in handy. The contract with FedLoan Servicing ends in December and many PSLF borrowers will have a new servicer. The Department of Education should have all of the necessary records, but if there is an issue, it helps to have backups.