Student Loan Refinancing: What Happens If There's Overpayment?

By Rebecca Safier · April 24, 2024 · 7 minute read

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Student Loan Refinancing: What Happens If There's Overpayment?

If there’s an overpayment on your student loan refinance, the money might be returned to you or go towards your next payment on your new loan. Another possibility is that you may have to request a student loan overpayment refund.

These kinds of situations do occur, and they are typically resolved without too much effort. Here’s a closer look at student loan overpayment when you are refinancing your debt and what you can do to get your money back.

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 $1,000 on your loan and make a $1,500 payment, you’ve overpaid by $500.

This might happen for a couple of reasons.

•   For one, you might send an extra payment before your loan servicer has processed your previous one. It might take some time for your payments to reflect in your account. If you send an extra payment before the servicer has applied your last one, you could end up overpaying your balance.

•   Overpaying loans can also happen when you refinance student loans. When you refinance, your new loan provider will pay back your old 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 and 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.

💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

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What Happens When a Student Loan Is Overpaid?

There are a few things that can happen when there’s an overpaid student loan. 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, that refinancing lender could send you back the payment or apply it toward your new, refinanced student loan.

Let’s say, for instance, that you decide to refinance your federal student loans with Alpha (a made-up company for the sake of this example). You understand that refinancing with a private student 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 Alpha sends an overpayment to your existing loan servicers, those servicers will generally return the extra amount to Alpha. Then, Alpha will apply that overpayment retroactively to the principal balance on your new Alpha 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 it has on file.

You can also receive 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.

💡 Quick Tip: If you have student loans with variable rates, you may want to consider refinancing to lock in a fixed rate before rates rise. But if you’re willing to take a risk to potentially save on interest — and will be able to pay off your student loans quickly — you might consider a variable rate.

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 refund. Here are a few options worth considering.

Put Towards Next Payment

If you already used that payment toward your old loans, you might put it toward your new refinanced loan to pay down your balance faster (if your new servicer hasn’t already sent it there). After all, you’d already designated that cash for a student loan payment, so you may not miss having it in your bank account.

Making extra payments on your student loans can 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% 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.

Use this tool for calculating student loan payments and finding out how much you can 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.

Use For Personal Expenses

Another option is putting that student loan refund toward personal expenses or your own savings. If you’re struggling to pay your rent or have other high-interest debt, for instance, covering those costs might be a priority over prepaying your student loans.

It’s also useful to have an emergency fund on hand that you can draw on if you lose your job or encounter unexpected expenses. Funneling that student loan refund into an emergency fund could save the day if you run into financial hardship.

However, using that refund on vacation or non-essential expenses might not be the best idea if you’re dealing with debt or don’t have an emergency fund in place. Consider your financial goals and priorities to determine the best use for that student loan refund.

The Takeaway

Overpaying student loans may be an inconvenience, but don’t worry about losing that money forever — you’ll get it back in the form of a refund or a payment toward your new, refinanced 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.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.


What happens if you overpay a student loan?

If you overpay a student loan, your servicer will 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 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.

Photo credit: iStock/stefanamer

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SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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