Category Archives: Borrowing

Student Loan Origination Fees: Up, Up? Or Away?

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I hate federal student loan origination fees.  They’re like a hidden tax on students.  And they’re made worse by the fact that they are now tied to the federal sequester budget cuts.  Before the sequester, these fees for graduate students were 1.0% on the Federal Direct Unsubsidized Stafford Loan and 4.0% on the Graduate PLUS Loan.  As a result of the sequester, these fees went up to 1.051% and 4.204%.  And then 1.072% and 4.288%.  And now, as of October 1, 2014, 1.073% and 4.292%.  And if Congress never votes to end the sequester cuts (or to address origination fees in some other way), these rates will continue to rise once or twice a year indefinitely.

I think the thing that irks me most about origination fees is the fact that they exist at all.  These fees were first added to these loans back in the 1980’s, intended to be a temporary cost saving measure.  Now here we are, decades later, and these “temporary” fees are an ongoing cash cow for the federal government.  For example, a law student who borrows a Grad PLUS Loan of $20,000 for the year will be charged an $858 origination fee on that loan.  That’s not exactly small change….that’s a month’s rent (or more)!

Origination fees are deducted up front from student loans before the funds disburse to the school.  This means that when a student asks for a certain amount of loan funds, they actually receive less than that amount.  Origination fees really aren’t very transparent.  Even if the student knows about them up front (which they should), the reality of the reduction doesn’t really hit home until the student sees that lower amount arrive…and they realize that they have to pay back the fee that was deducted.  With  interest.  Even though they didn’t get to use that money.  Seems to me that it’s a poorly designed, not very transparent tax on students who have limited or no income.

For years the National Association of Student Financial Aid Administrators (NASFAA) has been pushing for the elimination of these fees.  And finally there is a glimmer of hope that Congress might be listening.  Rep. Susan Davis from California has brought to the House a bill to eliminate these origination fees.  Finally!  I don’t have any illusions that this bill is actually going to pass in the upcoming lame duck session, but the fact that Congress is even talking about this issue is good news to me.  And hopefully it will eventually bring good news to all student loan borrowers.

What I Learned in Washington

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DC

I was lucky enough to go on a true adventure last week.  I accompanied a group representing the Pennsylvania Association of Student Financial Aid Administrators to Washington, DC to talk with various groups about issues of concern to the financial aid community.  We met with staff from several Pennsylvania Representatives, and also met in person with Representatives Charles Dent and Glenn Thompson. In addition to these meetings, we also met with staff from the House Committee on Education and the Workforce, the Senate Committee on Health, Education, Labor, and Pensions, as well as a representative from the Consumer Financial Protection Bureau.  These last three I mentioned were perhaps the most valuable meetings, as they had as many questions for us as we had for them.  Talking with the people in the trenches, dealing with real students, is quite valuable for these folks and they were happy to pick our brains a bit.

While the other aid administrators in my group were focused on things like Pell grants, my focus was strictly on the income-driven loan repayment plans and the federal Public Service Loan Forgiveness (PSLF) plan. The Pay as You Earn (PAYE) loan repayment option and the PSLF plan have been under the microscope a bit too much for my comfort lately.  These programs have been tagged by both sides of the political fence as being unsustainably expensive…though there is no real proof that that is the case.  President Obama’s most recent budget proposal called for capping the amount forgivable under PSLF at $57,500, as well as increasing the number of years required for non-public service loan forgiveness under PAYE from 20 to 25.  A recent Senate tax reform proposal called for making amounts forgiven under PSLF taxable.  Assorted other changes have been tossed around as well.  Thankfully every one of these proposals has been tied to legislation that is doomed not to move forward.  But once something is placed on “the list” of things that can be looked to for budget cuts, it is in danger of change.  It was my mission in DC to remind the decision makers that these programs were created in order to make it possible for student loan borrowers to be able to afford to choose a career in public service work.  I sat in various offices on Capitol Hill and explained how important it is for students to be able to choose their loan repayment option based on their chosen career path, rather than letting their amount of student loan debt choose the path of their career.

The reactions I received were a pleasant surprise.  I did not encounter anyone who wants PSLF to be taken away.  And of the eight Representatives’ staffs we met with, only Rep. Dent expressed strong feelings about wanting to make changes to the PSLF program.  I find this encouraging for the future of this program.  Maintaining the PSLF program protects career choice for prosecutors, public defenders, government workers, and public interest attorneys.  The other positive response was in regard to grandfathering existing borrowers if future changes to these programs should come.  The general consensus on the Hill is that if changes do happen to these programs in the future, those who have already borrowed student loans relying on the existence of these programs should not be subject to any changes—the changes should start with new borrowers as of a certain future date.

It was a whirlwind tour of Capitol Hill.  And I don’t know if I made any difference at all.  But I definitely feel a bit better knowing that I gave it a good effort.  And I definitely feel a bit more confident about the future of these federal student loan programs that I care about.  Change may come.  But I’m feeling like my current students and alumni are going to come out just fine.

My First Loan

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Do you remember your first loan you borrowed?  Perhaps it was a student loan.  Maybe it was a department store credit card.  But more likely it was a loan from your parents.

1970s-tv

My first loan from my parents is still amazingly vivid in my mind. My sister and I shared a bedroom and we really wanted to have a small black and white television in our room.  (It was the 1970’s. TV technology has come a long way since then!)  I think I was about eight years old and my sister was about eleven.  My parents agreed that we could have the TV, but we had to pay for it ourselves. It was my very first purchase on credit.  I don’t remember exactly how much the TV cost, but I think I had to repay somewhere in the neighborhood of $30 for my half of the TV.  Quite a lot for an eight year old in the 1970’s.  My father was very legitimate about the whole thing.  He had ledger sheets where he tracked the balance due.  I would save my change and make payments from my allowance and birthday and Christmas gifts.  And within a year I had paid my debt.

While my father did not charge me interest on this loan, he did teach me some very valuable lessons about purchasing on credit.  I learned the importance of making regular payments.  I learned the joy of watching my debt amount decrease.  I learned the pride of having successfully made a fairly major purchase.  I learned that sometimes you have to sacrifice the things you want to make payments on debt.  Debt is an obligation.  Credit allows you to buy things without having the money on hand in advance, which is very helpful for expensive things like houses and cars and higher education.  But paying it off…that’s freedom!