Singletary: Student borrowers who repaid loans may have a path to benefit from Biden plan

Patricia Young made the last payment on her daughter's federal student loans on Aug. 8.

Then on Aug. 24, President Biden announced a one-time forgiveness program that will wipe out up to $10,000 in federal student loan debt and up to $20,000 for Pell Grant recipients for individuals who earn $125,000 or less per year, or less than $250,000 for married couples.

Young, of Clinton, Md., doesn't have any regrets about paying off the loans.

She took advantage of the payment pauses enacted during the pandemic to pay off $12,000 in loans interest-free. Although there had been discussions at the time about loan forgiveness, Young said she wasn't waiting to see if it would happen.

"I just said, let me keep throwing money at the debt and get it down."

Young's daughter graduated from the University of Maryland Baltimore County in 2019 and did postgraduate work at the American Musical and Dramatic Academy in New York, graduating last year.

Like many other borrowers who could afford to continue making payments, Young saw a tremendous opportunity to aggressively pay down her daughter's education debt. Despite the pause, more than 9 million borrowers with Education Department-held loans made payments between April 2020 and June 2022, according to a Department of Education spokesperson.

While they took advantage of the zero-interest relief, these borrowers now want to benefit from this newest loan forgiveness.

It might work like this. Say you paid off $10,000. You call up your loan servicer and ask for a refund for the $10,000. You get the money back, and your loan is reinstated to $10,000. Then you apply for forgiveness under the Biden program.

What people are doing is technically allowed. Borrowers have one year to apply for a refund for payments made during the payment pause that began on March 13, 2020, according to the Education Department.

What's been killing folks is how student loan interest can increase the loan balance over time. Interest that is not paid through forbearance or deferral gets added to the principal, and then interest is charged on the new, larger balance.

Every time the government extended the student loan pause program, Young said it allowed her to pay down more of the principal. She decided to pay $300 per pay period — $600 per month. With the interest rate on the loans at zero percent, all her payments went directly to reducing the loan principal.

Young said she's already benefited from the COVID-19 emergency relief.

"The one good thing that came out of COVID was that they paused the interest payments," she said. "Well, that gave me time to pay back the money."

Many people requesting refunds intending to take advantage of Biden's loan forgiveness are not struggling financially. They didn't lose their job during the pandemic. They had more disposable income because pandemic shutdowns reduced their spending on eating out or other discretionary expenditures, freeing up money to pay off their loans.

As my grandmother Big Mama used to say, you can be right and be wrong.

Should you take advantage of the refund loophole?

But, as a taxpayer who will be footing the bill for this new loan forgiveness, I appreciate Young's decision.

"My daughter used the money to get the education. She got a degree. I don't really feel like I should even go through the process of trying to take advantage of the relief that they are giving people now," Young said. "I could pay back the money, and it was a blessing that I was able to do it. I was in the position financially that I could pay it back."

By the way, just because you made payments and are seeking a refund doesn't mean your loan is eligible for cancellation.

"They would still need to meet the income threshold of below $125,000 for individuals or $250,000 for married borrowers," the Education Department spokesperson said.

There's so much discourse over Biden's loan forgiveness plan. Some people are bitter that borrowers are getting their loans forgiven. Others feel the forgiveness is fair after struggling for years under an oppressive amount of debt.

"For those who do qualify and will have a portion of their debt forgiven, I couldn't be happier for them because I know what it feels like to have some of that burden lifted from your budget," Young said.

"The forgiveness is a good start but, in my opinion, the entire student loan process needs to be revamped so that the payments do not become such a burden. But that's another conversation for another day."