What Student Loan Origination Fees Really Cost Borrowers

Learn how to plan for this “hidden student loan tax.”

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There’s a hidden tax on student loans. At least, that’s the case several U.S. Senators are making. They’ve put forth a new bill, the Student Loan Tax Elimination Act, that if passed would get rid of student loan origination fees charged by the federal government.

Currently, origination fees on federal student loans range from just over 1% up to around 4.25% of the loan amount. It might not seem like much, but it adds up. The federal government collected $1.7 billion from origination fees paid in 2017-18 alone, according to the National Association of Student Aid Administrators (NASFAA)

Unfortunately, the Student Loan Tax Elimination has yet to go anywhere—which means student loan origination fees are unlikely to go anywhere, either. 

What Are Student Loan Origination Fees?

A student loan origination fee is a cost a borrower might be charged when they first originate or take out a student loan. Typically, a student loan origination fee is added to cover the administrative costs of processing and funding the loan.

Not all student loans have origination fees, but every federal student loan does. Students will face an origination fee, called a loan fee, every time they borrow through the Federal Direct Loan program.

Whether private lenders charge an origination fee can vary, but this fee is less common on private student loans. None of the lenders among our picks for the best private student loans, for example, lists an origination fee.

For the average undergraduate student, federal origination fees add $294 to total student loan costs, per NASFAA. Thanks to origination fees, graduate students pay $1,174 more towards student loans repaid over 10 years.

How Much Are Current Student Loan Origination Fees?

Student loan origination fees are most likely to impact students with federal student loans. The origination fees on federal student loans add considerable cost for student and parent borrowers. 

  • Direct Subsidized and Unsubsidized Loans carry an origination fee of 1.062% if borrowed before October 1, 2019 and 1.059% if borrowed on or after that date.
  • Direct PLUS Loans disbursed before October 1, 2019 face a fee of 4.248%, or a fee of 4.236% if borrowed on or after that date.

The above student loan origination fees are for the 2019-2020 school year. These fees are recalculated annually, so student loans disbursed before October 1, 2018, or on or after October 1, 2020, will have different origination fees.

Student loan origination fees aren’t paid out of pocket. Instead, they are charged as a percentage of the loan amount requested and withheld from the funds that are disbursed or paid out to you. This means that the total loan funds you receive will be less than the loan amount you requested.

Let’s look at an example of a freshman student who borrows $3,000 for the fall semester of 2019-2020.

  • $3,000 loan requested
  • $31.86 towards the 1.062% origination fee
  • $2,968.14 total loan funds received

The Compounding Costs of Student Loan Origination Fees

An extra 1% fee upfront might not seem like a huge deal. But since origination fees are rolled into your loan balance, they also increase the amount of interest you pay over the life of the loan—and end up costing more than just 1% of the loan principal.

Here’s a breakdown of the total costs of a Direct Unsubsidized Loan would be with and without the origination fee, assuming the 4.53% student loan rate set for Direct Loans for undergraduate students for the 2019-2020 school year.

Direct Unsubsidized Loan With and Without Origination Fees
 
$3,000 student loan (with origination fee)
$2,968 student loan (without origination fee)
Interest assessed over 4 years spent in college
$544
$538
Balance upon entering repayment $3,544 $3,506
Total interest paid over 10 years $870 $860
Total loan principal, interest, and fees $4,446 $4,366

In all, this origination fee of just over 1% ends up adding $80 to the total cost of borrowing—a real cost of 2.7% of the original $3,000 borrowed. This final $80 cost is also 2.5 times the initial origination fee of $32. 

This might not seem like much, but consider that this is the cost of an origination fee on a student loan borrowed for just one semester. The total costs could add up to hundreds of dollars over the eight or more semesters it takes most undergraduate students to earn a bachelor’s degree.

Costs add up even more quickly on Direct PLUS loans offered to graduate students and parents of undergraduate students. That’s because these loans have significantly higher origination fees and annual interest rates (7.08% for the 2019-2020 school year). 

How to Plan for Origination Fees

Learning about student loan origination fees can help you plan for these costs. Here are a few tips you can follow to manage these fees.

  • Request loan amounts with origination fees in mind. If you request to borrow $3,000 because those are your costs but get $2,968 instead, you’ll be left needing to cover that $32 that went towards the fee out of pocket. 

To avoid this, plan for origination fees when you request a student loan amount (calculators like this one from New York University can help). Requesting $3,032, for example, will cover the $32 origination fee and disburse $3,000 out to you.

  • Use federal student loans with lower fees and interest rates first. Direct Subsidized and Unsubsidized loans have much lower origination fees. Students should max out these student loans before turning to Direct PLUS loans that have higher origination fees and interest rates.
  • Shop around for private student loans. If you wind up needing a private student loan, spend some time researching different lenders and collecting student loan rate quotes. To ensure you get the best deal, compare annual percentage rates and look for a lender with no student loan origination fee.