Got student loans? Here are some hidden fees you might be unaware of.
When making a decision between federal and private student loans, most would-be borrowers assume that federal loans are typically the easiest option.
But most borrowers are not aware that federal loans have an origination fee that private loans don’t. What that means is that borrowers that borrow larger amounts at higher interest rates will end up paying more.
The National Association of Student Financial Aid Administrators reported that the federal government has charged almost $8.3 billion in origination fees since 2013, and almost one-third of that amount coming from parent borrowers.
How Much Are Student Loan Origination Fees?
Origination fees are monies paid to offset a lender’s costs for issuing the loan. This fee is usually applied as a percentage of the total loan. These percentages are usually changed once a year on Oct 1.
The current origination fees for undergrads and graduate students are 1.062% for federal subsidized and unsubsidized loans. For federal PLUS loans for parents and graduate students these fees are at 4.248%.
These fees are usually taken from the loan before the funds are applied to the education costs. For example, if parents take out a PLUS loan of $16,500 which is the average amount as reported by the College Board. Taking into account the rate of 4.248%, roughly $15,800 of that loan goes to the school and $700 goes to the federal government.
Still Think That’s Fair?
Now even though you don’t use that $700, you still have to pay it back with interest. Over four years of undergraduate school, a borrower would owe over $2800 in fees alone. And this number only gets exponentially greater the larger the loan gets.
It must be surprising to borrowers to have to repay money they never received. “This is something that is unnecessary and unfair to students,” says Lori Vedder, director of financial aid at the University of Michigan, adding that “students and families are often confused when they find out they must repay money they never received.”
For PLUS loan borrowers this could seem especially off-putting, considering that PLUS loans have a higher interest rate than other federal loans. PLUS loan borrowers also have no aggregate maximum and can take out more, up to the cost of attendance.
This translates into higher origination fees. A PLUS loan if $13,950 at a 7.08% interest rate would result in an origination fee of $593. The opportunity cost of putting that towards things like textbooks will definitely make them think twice and even consider private loan options.
Private Loans Don’t Include Origination Fees – or Protections
As private loans become a potential alternative to borrowers, it’s pertinent to note that they come with lower interest rates than federal loans and no origination fees.
Vedder says that this could make sense in some cases for people who plan to take a PLUS loan. However, she cautions borrowers that even though private loans can offer savings, they lack certain protections that are built-in for federal loans.
These protections include options to forgive loans in certain situations as well as eligibility to apply for income repayment plans.
Legislation to Remove Fees
Federal loans provide borrower protections but they make the government money by charging these origination fees. These fees were once part of the Federal Family Education Loan (FFEL) program, when private lenders were used to help issue federal loans and charged these fees to subsidize lenders’ costs.
The FFEL program was terminated in 2010, but these fees continue to be charged, lining the government’s pockets.
Bipartisan legislation was introduced this year to eliminate these origination fees. Justin Draeger, president and CEO if NASFAA advises borrowers to write or call their representatives to support this change.
Draeger refers to the origination fees as “literally just an extra tax on needy student borrowers.” This doesn’t make sense for a public benefit program. Let’s make the effort to change that today.
For all other financial advice, feel free to reach out to the Financial Helpers at the number below. We’re always ready to help you.