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.