Student Loan Refinancing: What Happens If There’s Overpayment?
If there’s an overpayment on your student loan, the money might be returned to you or go toward your next loan payment. Another possibility is that you may have to request a student loan overpayment refund.
Student loan overpayment can happen on your federal or private student loans or during student loan refinancing. Fortunately, it can be resolved without too much effort. Here’s a closer look at what happens when you overpay your student loans and how you can get your money back.
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Key Points
• Student loan overpayment occurs when borrowers pay more than the amount owed, and the excess funds may be returned or applied to future payments.
• Loan servicers typically apply overpayments to interest rather than principal unless borrowers specify otherwise.
• Borrowers can contact lenders to request that overpayments be directed toward the principal balance, helping to pay off loans faster and save on interest.
• Refunds from overpayments can be used to cover living expenses, pay down high-interest debt, or make additional principal payments on student loans, including refinanced loans.
• Overpaying student loans strategically toward principal can shorten loan terms and significantly reduce total interest paid, potentially saving hundreds of dollars over time.
Student Loan Overpayment Explained
Student loan overpayment occurs when you pay off more than the amount you owe to your loan servicer. If you owe $700 on your student loan and make a $850 payment, you’ve overpaid by $150.
This might happen for a couple of reasons.
• You might send an extra payment before your loan servicer has processed your previous one. It may take some time for your payments to be reflected in your account. If you send the extra payment before the servicer has applied your last payment, you could end up overpaying your loan balance.
• Overpaying loans can also happen when you refinance student loans. When you refinance, your new loan provider will pay back your old loan balances. Specifically, it will send the amount that’s agreed upon when you sign the Truth in Lending (TIL) Disclosure, which is one of the documents you must sign to finalize your loan refinance.
If you make a payment on your old loans after you’ve signed the TIL Disclosure but before your new refinancing provider has disbursed the payment, the amount sent to your old servicer will exceed your balance. Your new lender will have paid off your old loan and then some, resulting in a student loan overpayment.
That’s not to say that you shouldn’t keep paying back your student loans while you’re waiting for refinancing to go through. In fact, it’s important to keep up with repayment so you don’t miss any due dates when it’s time to pay back student loans. Otherwise, you could end up with a negative mark on your credit report. Wait until your new refinanced student loan is up and running before you stop paying your old student loans. Any overpayment that may have been made can be resolved after that time.
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What Happens When a Student Loan Is Overpaid?
There are a few things that can happen when there are overpaid student loans. For one, a loan servicer might send the extra payment back to you via check or direct deposit.
If a refinancing provider overpaid your account, your old servicer might send the payment back to them. Then, the refinancing lender could send you back the payment or apply it toward your new, refinanced student loan.
Refund Process and Timelines
Let’s say, for instance, after using a student loan refinancing calculator, you’ve decided to refinance your federal student loans with a private lender. You understand that your new refinanced loan means you forfeit federal benefits and protections, and you know that if you refinance for an extended term, you may pay more interest over the life of the loan. If the new private lender sends an overpayment to your existing loan servicers, those servicers will generally return the extra amount to the private lender. The lender will then typically apply that overpayment retroactively to the principal balance on your new refinance loan, a process that may take about six to eight weeks.
In some cases, your old servicer will send the payment back to you. For example, a lender might send a refund to the borrower directly if the overpaid amount is less than $500. In this case, the amount might be sent back to you via check using the address the loan servicer has on file.
You can also receive the refund as a direct deposit, but you may need to request it specifically. Reach out to your loan servicer to find out how it deals with excess payments and any steps you need to take to receive your student loan refund.
How Overpayment Affects Loan Balance and Interest
Unless you’ve specified otherwise, a student loan overpayment that is not returned to you may be applied toward the interest on the student loan rather than the principal balance. However, applying more money toward the loan balance is what reduces the amount of interest that accrues and helps you end up paying less total interest on the loan overall.
An overpayment could also be applied to your next loan payment, which typically goes toward the future interest on the loan rather than the principal.
You can contact your lender to instruct them that you want any overpayments to be applied to the principal of your loan.
Recommended: Student Loan Consolidation
What Should I Do With My Refund?
Finding out you overpaid your student loans can result in a windfall of cash. You may be wondering what to do with your student loan overpayment refund once you receive it. Here are a few options to consider.
Put Toward Next Payment
You could put the refund toward the next payment of your loan to help pay it down faster. After all, you’ve already designated that cash for a student loan payment anyway, so you may not miss having it in your bank account.
Use For Personal Expenses
Another option is to use the refund to cover personal expenses such as rent, groceries, transportation, or other daily living expenses, or for paying down high-interest debt, like credit card debt. Covering costs like these might be a priority over prepaying your student loans.
Reapply Toward Loan Principal
Putting the overpayment toward the principal balance of your loan could help you pay your student loan off early and save on interest charges. Let’s say, for example, that you owe $5,000 at a 7.00% interest rate with a five-year repayment term. If you make an extra payment of $500, you’ll get out of debt eight months sooner and save $292 in interest.
You can calculate your student loan payments and then see how much you might save by making extra payments. If you choose this route, instruct your loan servicer to apply the extra payment to your principal balance, rather than saving it for a future payment.
Build or Replenish Emergency Savings
It’s useful to have an emergency fund on hand with at least three to six months’ worth of living expenses that you can draw on if you lose your job or encounter unexpected costs. Funneling that student loan refund into an existing emergency fund, or starting a fund if you don’t yet have one, could help save the day if you run into financial hardship.
How to Avoid Future Overpayments
Rather than dealing with student loan overpayment after the fact, you can take steps to avoid it moving forward. These strategies can help.
Monitor Loan Servicer Activity
Log into your account on your loan servicer’s platform regularly to make sure your payments are being applied correctly. Open and read all communications from your servicer, including emails and those sent via snail mail, and carefully review all your loan statements each month. If you spot an overpayment, make sure it was applied to the balance. If it wasn’t, contact your loan servicer to remedy the situation.
Set Up Automated Payment Controls
Log into your online account on your servicer’s website and set up automated payment for your student loans. (As a bonus, doing this may also give you a small discount on your loan’s interest rate.) Along with the payment date and amount, specify how you want your payments to be applied, including any overpayments that are made. And again, review your statements and check your account to make sure the payments are being applied the way you want them to be.
The Takeaway
Overpaying student loans may be an inconvenience, but don’t worry about losing that money — you’ll typically get it back in the form of a refund or a payment toward your student loan. The exact process may vary by lender, so reach out to yours to find out what will happen next and whether there are any steps you must take to get your refund. Ensure that your loan servicers have your current address on hand, too, in case they need to mail you a check.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
What happens if you overpay a student loan?
If you overpay a student loan, your servicer will generally issue a refund. That refund may go to you or, in the case of refinancing, to the third-party servicer that issued the payment. The exact process may vary by lender, so get in touch with yours to find out where it will send your refund.
What happens to excess student loan money?
When you borrow a student loan, the lender usually sends the amount directly to your financial aid office, which then applies it to required expenses like tuition and fees. It then sends any excess funds to you so you can use the money on books, supplies, living expenses, and other education-related costs. If you find you borrowed more than you need, you could consider returning the amount to your lender. If you return part of a federal student loan within 120 days of disbursement, you won’t have to pay any fees or interest on the amount.
Does refinancing affect student loan forgiveness?
Refinancing student loans can affect your eligibility for loan forgiveness. Most loan forgiveness programs are federal, and when you refinance federal loans with a private lender, you lose access to federal programs, such as Public Service Loan Forgiveness and Teacher Loan Forgiveness.
Can I request a refund of my student loan overpayment?
Yes, you can request a refund of a student loan overpayment. Reach out to your loan servicer and ask to have the overpayment amount refunded to you. Be sure to specify how you would like the refund — via direct deposit or a check that’s mailed to you.
Does overpaying help pay off loans faster or reduce interest?
Overpaying your student loans may help you repay your loans faster and reduce the interest rate as long as the overpayment is directed to the principal balance of the loan. Reducing the principal will reduce the amount of interest you owe. It can also help shorten your loan term.
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