Biden Sent Out Refunds for Student Loans, But Americans Shouldn't Spend It

  • President Joe Biden announced a plan to forgive up to $20,000 of student loans for those who qualify, but two lawsuits have appeared before the U.S. Supreme Court challenging the plan.
  • Refund checks were sent out to borrowers who made payments during the pandemic pause, but they might have to return the money if the Supreme Court rules against Biden's plan.
  • The Supreme Court is expected to make a decision by June, and Biden has expressed uncertainty about the outcome.

Some student loan borrowers who received refund checks in the mail might want to wait to spend the money until the U.S. Supreme Court decides on President Joe Biden's student loan forgiveness plan.

In August, Biden announced a plan to forgive up to $20,000 of student debt for those who qualify, a plan that could cost the government up to $400 billion. A contentious issue, proponents celebrated the move and critics voiced concern that the administration overstepped its authority with the decision. Two lawsuits challenging the plan have appeared before the Supreme Court, and a decision is expected by June, impacting an estimated 43 million borrowers.

Anticipating the Supreme Court to rule in its favor, the Biden administration offered borrowers a chance to be refunded for payments they made after loans were put on pause because of the COVID-19 pandemic. Borrowers had to submit an application to be eligible for the refund. The administration started issuing refund checks in the fall. But it's possible borrowers will have to repay the refund amount if the Supreme Court rules against the Biden administration.

President Joe Biden
President Joe Biden announced his student loan forgiveness plan in August but is now being challenged in the U.S. Supreme Court. Getty

Who Got Refunds for Their Student Loans?

During the pandemic, the CARES Act paused student loan payments and dropped interest to 0 percent. The refund checks are designed for debtors who made voluntary payments during the pause from March 13, 2020, to December 31, 2022. If the payments dropped the debtor's student loan amount below the amount of debt relief they could receive under Biden's plan, the checks refunded the amount paid during the pandemic up to the amount eligible for debt relief.

Only those with federal loans were eligible, and borrowers needed to submit a Student Loan Debt Relief Application to receive a refund.

Is Student Loan Refund Same as Forgiveness?

No. The refund benefits those who continued to make payments on their loans while payments were paused during the pandemic.

Federal Student Aid, an office of the U.S. Department of Education (DOE), provided the following example on its website.

"Let's say you're eligible for $10,000 in debt relief. If you currently owe $9,500, that amount of relief will be applied to your loan(s). If you paid $1,000 during the payment pause, you'll be automatically refunded $500—the remaining amount of your $10,000 of debt relief," the site said.

Unlike the refund, which was for payments already made, forgiveness would wipe out the part of the eligible loan that was unpaid.

What is Biden's Plan for Student Loan Forgiveness?

Biden's would eliminate $10,000 in federal student loan debt for those who earn less than $125,000 a year, and $20,000 for those who received Pell grants, which is about one-third of U.S. undergraduates. Private loans are not eligible for student loan forgiveness under the plan.

More than 45 million Americans owe a combined $1.7 trillion in federal student debt. Nearly one-third of student loan borrowers owe less than $10,000, and those who meet the income restrictions would have their entire loan wiped out under the plan.

A spokesperson from the DOE told Newsweek in an email that the refund for past payments was not implemented as part of Biden's one-time student debt relief.

Newsweek reached out to the White House by email for comment.

What Happens if Court Knocks Down Program?

If the Supreme Court sides against the Biden administration's plan for student loan forgiveness, borrowers will still be required to pay their entire loan, even the refunded portion that was already mailed out. Borrowers will also likely have to resume paying interest on the full loan amount, which is why it's best not to spend the refunded money until the issue is settled. If the forgiveness plan is knocked down, borrowers would be financially better off if they can immediately reduce their principal amount with the refunded money to lessen the amount of interest that accumulates.

Most checks are eligible for up to six months before becoming void if they aren't cashed. Those who received refunds are urged not to spend the money but cash the check to avoid the money becoming void if the plan is approved.

Student loan expert Mark Kantrowitz told Newsweek that people receiving refunds shouldn't spend the money.

"They should put the money in a high-yield savings account. That lets them earn some interest while keeping the money liquid," Kantrowitz said. "If the US Supreme Court blocks the president's student loan forgiveness plan, they will have to repay the money, but not necessarily all at once. When they received the refund, it increased their loan balance. They should not spend the money on non-essentials. It is, after all, borrowed money."

There are two lawsuits challenging Biden's actions and both appeared before the Supreme Court in February. Justices likely won't reach a decision on either case until June.

One of the lawsuits, Biden v. Nebraska, is composed of six Republican-led states—Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina—claiming that the Biden administration is overstepping its authority with the program. The lawsuit also alleges that the student loan forgiveness program would threaten state organizations that profit from federal student loans.

The other lawsuit, Department of Education v. Brown, was filed by the Job Creators Network Foundation, a consumer advocacy group that claims the Biden administration failed to complete a notice and comment process before beginning the program.

In March, Biden told reporters he was confident his action was lawful, but he said he was unsure about the Supreme Court's decision. The court is dominated 6-3 by conservatives, raising questions about the likelihood of Biden's plan fending off the legal challenge.

Update 03/14/23, 10:13 a.m. ET: This article was updated with comment from a Department of Education spokesperson.