Here's What I'm Doing With My $6,000 Student Loan Refund

The Department of Education started sending out checks, and if you get one, I don't recommend spending this money.

Courtney Johnston Senior Editor
Courtney Johnston is a senior editor leading the CNET Money team. Passionate about financial literacy and inclusion, she has a decade of experience as a freelance journalist covering policy, financial news, real estate and investing. A New Jersey native, she graduated with an M.A. in English Literature and Professional Writing from the University of Indianapolis, where she also worked as a graduate writing instructor.
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Courtney Johnston
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Early in December, thousands of dollars were deposited into my bank account from the US Department of Education. And though it's tempting to spend this money, I'm not taking any risks until there's clarity on student loan forgiveness.

Student loan borrowers have been on a wild ride this year. From wondering when federal loan payments were going to restart to nearly receiving $10,000 to $20,000 in federal loan forgiveness per borrower, we're all feeling whiplash from the back and forth.

Back in September, shortly after the White House's student loan forgiveness announcement, I wrote an article about how I requested a refund from my federal student loan servicer. During the pandemic, I paid down my student loan balance to about $14,000. Since I was eligible for $20,000 in forgiveness, requesting a refund of $6,000 would help me maximize my debt relief.

On Dec. 1, more than 10 weeks after making the request, that refund hit my bank account. Now I find myself with quite a bit more money than I expected in the middle of the holiday season -- but I'm not touching these funds until a decision has been made on student loan forgiveness. And if you receive a student loan refund, I recommend you don't either. 

Here's what I'm doing with my refund money and how I'm creating a savings plan for my student loans while we wait for the Supreme Court's ruling on President Joe Biden's student debt relief plan. 

I'm not spending any of my refund

Using some of my refund money for holiday shopping and traveling is an enticing proposition, but not when I consider the chance I'll have to repay it.

If the student loan forgiveness plan is deemed unconstitutional, I'll want to return this money to my loan servicer to help pay down my balance. And I'll do that immediately while the payment pause is still in effect (it was recently extended until June 30, 2023) and while interest rates are also temporarily set to 0%.

I'm stashing my money in a high-yield savings account

The first thing I did when my refund money hit my bank account was to transfer it to a high-yield savings account, separate from my other finances. I don't have debit card access to this account, which is a tip I recommend if you want to avoid the temptation of dipping into any of this money.

Right now, online high-yield savings accounts are earning over 3% annual percentage yield, so I figure I can also earn a bit of interest while my money sits. It won't make me rich by any means, but it's better than putting it in a traditional bank's savings account that would only pay me pennies on my money.

I'm making monthly payments (to myself)

If the student loan forgiveness program remains blocked indefinitely or doesn't get implemented at all, then I'm going to owe $14,000 left on my student loans (in addition to the $6,000 I received as a refund). Until I know for sure, I plan to make student loan payments to myself, rather than to the student loan company. In other words, instead of paying my loan servicer hundreds of dollars per month, I'm putting that cash directly into the high-yield savings account where my refund is.

I'm doing this for a few reasons. First, there's no reason to make payments while the payment pause is in effect and forgiveness is a possibility. But since I can afford to make student loan payments right now -- and I had been gearing up just in case payments resume in January -- building up my savings feels like a smart move.

This way, if my debt isn't forgiven, I can make an even bigger dent in my remaining balance when payments resume. And if forgiveness does go through, I'll have money set aside to pay the taxes I'll owe on my debt relief, since I live in a state that will levy state and local taxes on my forgiven loan amount.

If you can afford to make monthly payments to yourself while student loans remain on pause, I recommend it. Then, even if loan forgiveness is approved, you'll have a nice emergency savings fund or additional funds at your disposal. 

Of course, this strategy only makes sense if you can afford to make monthly payments to yourself. If you can't, I recommend applying for an income-driven repayment plan to make your student loan payments more affordable in case the debt relief plan does not go through.

Keep following CNET for the latest news on student loan forgiveness. 

Read more: 'Paying for the Rest of My Life.' Student Loan Debt Is Crushing an Entire Generation