Tammy Trevino was not sure whether to borrow a federal student loan or a private student loan for her daughter’s education. Then she learned that federal loans come with a set-up fee that private loans typically don’t.
“I was surprised,” says Trevino, 52, of Victoria, Texas. “My hypothesis was [federal loans] would be the best option for school. “
Federal loans are generally the best and easiest option, and the fees have minimal effect on these loans for undergraduates. But parents, like Trevino, as well as graduate students – who typically borrow larger sums at higher interest rates – pay much more.
The federal government has billed about $ 8.3 billion in assembly fees since 2013, according to the National Association of Student Financial Aid Administrators, nearly a third of which comes from parent borrowers.
Here’s what borrowers should know about these fees.
What are the student loan origination fees?
The origination fee is money you pay to offset a lender’s fees for granting a loan. These fees are expressed as a percentage of the total loan amount.
The tuition fee is currently 1.057% for federal subsidized and unsubsidized loans for undergraduate and graduate students. The fee is 4.228% for Federal PLUS loans for parents and graduate students. These percentages change every year on October 1.
The creation fee is taken from the loan amount before funds are applied to your education costs.
For example, let’s say you take out $ 16,450 in PLUS loans – the average amount parents borrow each year, according to the most recent College Board data. With fees of 4,228 p. About $ 15,755 of that loan would go to school and $ 695 would go to the federal government.
“Useless and unfair”
Even if you don’t use that $ 695, you still pay it back, plus interest. Over four years in school, that’s $ 2,780 that a borrower owes in fees alone.
Lori Vedder, director of financial aid at the University of Michigan-Flint, says students and families are often confused when they find out they have to pay back money they never received.
“This is something that is unnecessary and unfair to the students,” says Vedder.
It may seem particularly unfair to MORE borrower loans. At 5.30%, PLUS loans have a higher interest rate than the 2.75% of other federal undergraduate loans. PLUS borrowers can also get more – up to the cost of participation, less other support received, with no overall maximum.
As part of his daughter’s financial aid to Texas State University in San Marcos, TX, Trevino was offered a parent PLUS loan of $ 13,950, which is said to have an origination fee of 590. $.
That’s $ 590 that Trevino, a single mom, could spend on other education expenses. It almost reaches the cost of $ 780 for books and supplies in the state of Texas, according to the latest estimate from the National Center for Education Statistics.
“It definitely made me think I needed to do more research,” Trevino says. She is considering private loan options.
Private loans may lack origination fees – and protections
All federal student loans have origination fees, and schools do not have the option of waiving these fees.
Justin Draeger, president and CEO of NASFAA, says there is really nothing parents and families can do about these fees “except to realize up front that the amount they [borrowing] will not be the same amount they receive. “
But private student loans are a potential alternative. Most private loans do not charge an origination fee and may offer lower interest rates than federal loans, depending on your financial situation.
Vedder says this route might make sense in some cases, such as a parent with excellent credit who is considering taking out a PLUS loan. However, she cautions borrowers to proceed cautiously, even though private loans offer potential savings.
“Federal loans have built-in protections that private loans typically don’t,” she says.
These protections include options that can defer or cancel your loans in certain situations, as well as repayment plans that allow you to pay based on your income.
Legislation seeks to eliminate fees
Federal loans offer unsurpassed protections and programs to borrowers, but they make money for the government through origination fees. Draeger says it doesn’t make sense for a public service program.
These fees were once part of the federal family education loan program, which used private lenders to issue federal loans and charged these fees to subsidize the costs of the lenders.
The FFEL program ended in 2010, but the costs remain.
Biparty legislation was introduced in the House and Senate earlier this year to eliminate assembly fees. Draeger advises borrowers to write to their representatives to support this change.
“It’s literally just an additional tax for needy student borrowers,” says Draeger.
In a statement to NerdWallet, a spokesperson for the US Department of Education said the creation fee is now being used to reduce the overall costs of the federal student aid program.