When looking for an education loan, some borrowers overlook the student loan origination fees charged by some lenders. These borrowers may be surprised to see that they receive less money than the total amount borrowed, and, in some cases, make inaccurate comparisons between student loan options.
Understanding student loan origination fees and how they work can help you be a smart borrower.
How Student Loan Origination Fees Are Assessed
Student loan origination fees are costs that are sometimes assessed by lenders when they issue or process a loan. Federal student loans, as well as some private student loans, have origination fees that are a percentage of the total loan amount. The loan fee is deducted proportionately from each loan disbursement you receive while enrolled in school. This means the money you receive will be less than the amount you actually borrow.
Know that you’re responsible for repaying the entire amount you borrowed and not just the amount you received. This means you pay interest on the origination fee, and each year when you take out a new student loan you are assessed an origination fee on the new loan amount. This is why it is critical to understand that even seemingly small fees matter and can increase your costs over time.
For federal student loans, origination fees were enacted by Congress and vary by loan type. For loans first disbursed on or after Oct. 1, 2020, and before Oct. 1, 2021, federal direct subsidized and unsubsidized loans will have an origination fee of 1.057%, while Parent PLUS loans will carry a much higher origination fee of 4.228%.
For private student loans, origination fees vary by lender. While some private lenders charge origination fees, many do not. Some lenders may call it a disbursement fee or application fee.
If your private student lender charges a fee, it works similarly to the federal student loan program. The fee, likely based on a percentage of the total loan amount, will be set in your contract, known as the promissory note, and deducted from your loan before it is disbursed.
Small Differences in Student Loan Fees Can Add Up
Student loan origination fees may seem small but can increase your costs over time. Because these fees are deducted from the total amount of the loan, you are paying the fee with borrowed money and will pay interest on the fee paid.
Here’s how it works under the origination fee rate for loans disbursed on or after Oct. 1, 2020: If you borrow $5,000 in federal direct student loans, $52.85 would be deducted from your loan total before it is disbursed. Similarly, if your parent borrowed the same amount in Parent PLUS loans, a $211.40 fee would be deducted. In both cases, you would still owe $5,000 plus any interest that accrues.
To estimate how much the origination fee could cost you over time, you can multiply the fee amount by your student loan interest rate and the number of years in your repayment term.
The larger the fee, the more you will pay in interest before the loan is paid off. Similarly, if you take advantage of one of the extended or income-based repayment plans offered by the federal government, you will extend the life of your student loan and pay even more interest over time. Keep in mind that you will pay an origination fee each time a new loan is disbursed, so you may want to think about the fee amounts in total.
The same goes for origination fees that are assessed by private lenders. If you plan to borrow multiple years, you will pay the fee plus interest each time.
How to Compare Student Loan Fee Costs
Although some private student loans do not have origination fees, even with those fees, federal direct loans generally have a lower interest rate and cost less overall. Federal direct loans also have borrower benefits and protections — like income-driven repayment and student loan forgiveness options — that most private loans do not have. You should always exhaust your federal direct student loan limit before borrowing a private student loan.
However, Parent PLUS and Graduate PLUS loans have higher fees, higher interest rates and fewer borrower benefits and protections than federal direct loans, so it is usually worth comparing the PLUS loans to education loans in the private market.
When you receive a quote from a private student lender, it will provide you with an interest rate and an annual percentage rate, or APR. The APR includes the interest rate and any fees assessed by your lender, expressed as a yearly rate. This makes it easier to compare quotes across lenders because you can simply compare APRs, which will give you a better idea of how much you would pay in fees.
Still, you should be sure to read student loan offers and promissory notes carefully and look at any fees together when making comparisons.
Unfortunately, the federal direct loans and PLUS loans do not provide an APR, which makes it a little more difficult to compare these loans to private loans. You will have to look at interest rates and fees separately and calculate an APR on your own.
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