How Federal Loan Overpayment Refunds Make Student Loans Burn With Your Money

For many college students, one of the most exciting events of a new semester isn’t on their school calendar: Refund Day.

Though the day is different on different campuses, the unexpected result is the same: Then the millions of students who are currently taking out federal college loans will learn how much of their approved amount is left after the school takes its share of tuition and other fees has . Students can refuse the refund and reduce their debt or accept the money. Although they are technically required to spend it on education-related expenses, the administrators conceded that there is no mechanism to monitor their spending.

“I’m 23, if you give me a refund check I’ll go shopping,” a Philadelphia student told a Focus group on student loans and debt relief, which is being run by New America, an education think tank. “I don’t understand what that means – you just gave me free money. And nobody stops me because it comes to me.”

Some education experts say the issue of student loan repayment scrutiny should receive more attention as the Biden administration seeks to pay off perhaps $400 billion of the federal government’s, i.e. taxpayers’, $1.7 trillion in student loan debt. Biden tuition debt relief plan is already controversial and went to the Supreme Courtbut the idea that some of the debt paid off could have been used to pay for travel, video games or gifts might find some taxpayers particularly galling.

“When we did focus groups, refunds were always an issue that came up naturally,” said Jason Delisle, who helped lead New America research in 2015 and is now a senior policy fellow at the Urban Institute. “The reaction in the room was always, ‘Reimbursement checks – yeah, they’re kind of crazy!'”

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Taxpayers have the bulk of the bag, as President Obama brushed aside banks as lenders as part of his 2010 victory in passing Obamacare by arguing – very wrongly, as it turns out – that a government takeover of student loans is a moneymaker would prove. The government holds 93 percent of the $1.7 trillion debt and the college loan program is in the red, according to the Congressional Budget Office.

However, scrutinizing the refunds will be challenging because basic information about them is elusive – including how they cost and how they are used.

The Department of Education told RealClearInvestigations that it doesn’t track how much of the estimated $82 billion it has awarded Student loans in fiscal year 2021 was reimbursed to students and said the number should be known to the individual schools that issue it. (These payments are separate from the refunds the Biden administration approved in August for those who made loan payments during the pandemic.)

RCI contacted more than a dozen schools, a combination of leading public universities, private colleges, historically black colleges and universities, and one community college. Although they all issue refunds, none were able or willing to provide a figure of how much they had disbursed in refunds for federal college loans, which remain the primary lending vehicle for individuals funding undergraduate and graduate schools.

Refunds can be made to parents or students who borrow for college, a group that numbered 7.2 million people in fiscal 2021, according to the DOE.

Rutgers University said it plans to activate new software next year to give it a number for refunds issued, but it doesn’t have that information at this time. Similarly, the University of Idaho said it had no information on refunds. The University of Iowa refused to provide any figures and said it would not search its data to determine how much it reimbursed.

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Some schools — such as the University of North Carolina, Louisiana State University, the University of Vermont, the University of Virginia, Spelman College and Suffolk University — did not respond to requests for information about how much they reimbursed students.

Florida A&M University, a historically black school, provided figures for the federal loans it disbursed but did not answer questions about reimbursements.

Other schools, such as Ohio State University and Texas A&M, responded to inquiries but ultimately proved unable or unwilling to provide reimbursement figures.

“We don’t have specific data on financial repayments just for directly originated loans,” said Delisa Falks, associate vice president of enrollment and academic services at Texas A&M. “This would require some work and we are not in a place where we have the resources to provide this.”

Even scholars studying student loans scratched their heads.

“That’s a super interesting question, and the reality is that there’s not a great deal of information available,” said Adam Looney, the executive director of the Marriner S. Eccles Institute at the University of Utah and a fellow at the Brookings Institute who studies college loans . “In fact, I feel like it’s something that people don’t like to advertise or talk about.”

While the total amount of student loans repaid each year is unknown, it is almost certainly significant. If 1 percent of the loans were repaid, that would be $820 million in 2022.

Another clue to their importance is their online prominence. College and financial advice related websites are full of information on how to apply for and get a refund, all carrying a touch of free money with only the fine print reminding that student refunds will theoretically have to be paid back one day.

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On Dec. 1, website NerdWallet warned students that “nobody should ever spend the student loan repayment check just yet,” with a reminder that the repayments are included in the debt—that is, if President Biden fails to wipe them out Student debt complete.

“Beyond the data, the implications are pretty important,” Looney said. “For many students, especially graduate students, this is a relatively cheap cash advance with no credit check. You just get a check from the government for lots of money and you can spend it on whatever you want, even if you don’t need it or if you find it impossible to pay it back.”

The 2015 report, authored by Delisle and Alexander Holt, found that many borrowers had mixed feelings about refund checks.

On the one hand, “participants felt that these checks embodied how easy it was to get a federal student loan and the bad incentives that came with it, with some noting that it made it seem like the ‘money wasn’t real'” , concluded the report . “They found that payback checks were particularly problematic for young and naïve students, as they allowed them to take on debt they later deemed unworthy or had difficulty repaying.”

On the other hand, many took one “Seize the day” attitude towards money.

I went to Russia with my best friend for a month,” said a Chicago student. “It was quite a great experience; I don’t think I would give that back.”

James Varney

James Varney is a staff writer at RealClearPolitics. He was previously the national correspondent for the Washington Times. Varney currently resides in Mandeville, Louisiana.

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