What Is an Origination Fee on a Student Loan?

FT Contributor  | 

Whenever you borrow money, the lender includes a loan origination fee to offset the costs of lending. Charged as a percentage of the loan, the fee is taken from the total loan amount before it’s disbursed, reducing the total amount of money you receive.

Student loans issued through the federal government are no exception when it comes to origination fees. When you borrow money for school from the government, you’re charged a loan origination fee of about 1% (for student borrowers) or 4% (for Direct PLUS loans, which are taken out by parents or graduate students).

Although the actual fee amount may seem inconsequential on the surface, the effect on your overall debt and how much you pay back over time can be substantial. In fact, some argue that loan origination fees represent a tax on student borrowers, and lawmakers have proposed legislation, the Student Loan Tax Elimination Act, to stop the practice of charging the fee.

Which Student Loans Have Origination Fees?

Any time you borrow money from the federal government for school, you will pay an origination fee on the loan. Every loan includes this fee. Therefore, if you take multiple loans in a school year (for example, a subsidized and unsubsidized loan for each semester) you will pay a fee for each loan.

Although all government-issued student loans come with origination fees, not all private student lenders charge origination fees on their loans. However, private loans from banks and other lenders have different terms, and may not have the same repayment flexibility as a federal student loan.

For instance, bank loans are unlikely to offer extended or income-based repayment plans. Therefore, it’s important to research all of your student loan options before accepting any offers, and know exactly what fees are charged and how they will affect your total costs.

How Much Is the Student Loan Origination Fee?

The federal government offers multiple student loan products, each with its own origination fee. These fees are a significant source of revenue for the government: in the 2017-2018 school year, origination fees topped $1.7 billion, and over the past five years, these fees have brought in $8.3 billion.

For loans distributed between October 1, 2019 and September 30, 2020,  the loan origination fees are as follows:

  • Direct Subsidized Loan: 1.059%;
  • Direct Unsubsidized Loan: 1.059%;
  • Direct Unsubsidized Loan, Graduate: 1.059%;
  • Direct PLUS Loan, Parent: 4.236%;
  • Direct PLUS Loan, Graduate: 4.236%.

For loans distributed between October 1, 2018 and September 30, 2019, the loan origination fees were as follows:

  • Direct Subsidized Loan: 1.0629%;
  • Direct Unsubsidized Loan: 1.062%;
  • Direct Unsubsidized Loan, Graduate: 1.062%;
  • Direct PLUS Loan, Parent: 4.248%;
  • Direct PLUS Loan, Graduate: 4.248%.

Student loan fees are recalculated every year, so it’s possible you’ll pay a different percentage each year you are in school.

The Impact of Student Loan Origination Fees

Although student loan origination fee rates seem low, they can have a significant impact on your overall debt and budget. You don’t pay origination fees out of pocket, but rather they are deducted from the amount of your loan. For example, if you take a $5,000 Direct Subsidized Loan with a 1.066% origination fee, you’ll receive $4,946.70, and the government takes $53.30. Your total loan balance is still $5,000, though, and when interest is added, it’s added on the full $5,000.

Over time, origination fees increase the overall cost of your loan, because the interest compounded on your debt drives the actual cost much higher than the initial 1.066%. And if you’re borrowing money for graduate school, the cost is even more, since the origination fee and interest rates on those loans are higher. Again, even if the ultimate cost for a single loan doesn’t amount to much, taking multiple loans over the course of your time in school drives up your costs.

Doing your homework, then, is important before you borrow money for school, as student loan origination fees can affect your budget and loan repayments.

Effects on Your Budget

As you plan your budget for college, keep in mind that origination fees will reduce how much money you actually get for school, which in turn can affect how much you need to pay out of pocket or via other sources. If you’re counting on student loans to help you cover living expenses, for instance, the origination fee will reduce your payment, which needs to be accounted for in your budgeting.

If the origination fee is going to make a significant difference to your out-of-pocket expenses, request a loan with the origination fee in mind. For example, if you need $5,000, request a loan for $5,054 to cover the fee, keeping in mind that you’ll need to repay slightly more over the life of the loan.

It’s also important to consider the effect of origination fees on your overall debt burden as you go through school. Although it may be tempting to borrow money now, you might regret that decision later when you have huge monthly payments. Budgeting now to cover your education costs in ways that don’t require taking on significant debt is a better choice in the long run.

Effects on Loan Repayment

Because you cannot pay origination fees when you take out student loans from the government, you need to consider how they will affect your overall repayment plan.

Although having the ability to qualify for a variety of repayment plans after graduation, including income-driven plans, might make the origination fees worthwhile, the repayment plan you select also has an impact on how much you repay over time. Opting for an extended repayment plan, for instance, increases the total cost of your loan, especially when you account for the origination fees.

Therefore, again, it’s important to borrow as little as possible, and to know the full cost of borrowing before you sign on the dotted line. The choices you make can have a significant impact on your budget after graduation. With that in mind, before you borrow:

  • Research private loan options: Request quotes from several lenders, and pay close attention to the overall cost of the loan and repayment terms. Look for lenders that do not charge origination fees.
  • Opt for Direct Loans first: Federal Subsidized and Unsubsidized Direct Loans have lower interest rates and origination fees than Direct PLUS Loans issued to parents. Only take PLUS Loans if you have no other options.
  • Be creative: Student loans aren’t the only way to pay for school. Explore all your options, including scholarships, work study, and grants. There are many programs in place to reduce college costs, and reduce the student loan burden.

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