When you review your student loan disbursement, you might see one expense that could confuse you: a loan origination fee.
You’re probably wondering what that means, maybe even panicking about yet another fee. You might not even realize it could add even more to your costs in repayment. Altogether, these fees add around $150 per $10,000 for undergraduates.
However, if you take the time to learn about them before you apply for a student loan, you’ll be in great shape when it’s time to choose the right loan for you. Here’s what you need to know.
What is a loan origination fee?
A student loan origination fee catches most people off guard because it isn’t taken out when you apply for the loan. Instead, it’s applied when you receive your money during the disbursement.
Essentially, this fee is the cost of the bank loaning you the money in the first place. It usually amounts to a small percentage of the entire loan amount.
A student loan origination fee covers the costs of issuing your aid because, let’s face it, the bank isn’t going to take a loss when it comes to loaning consumers money. It wants to make every penny it lends count, no matter what.
How much does a loan origination fee cost?
Here’s another difference between federal and private student loans: Federal loans always come with a loan origination fee, while private loans sometimes don’t.
This fact alone isn’t a reason to run off and apply for private loans. However, private student lenders can make their own loan terms. And since they are able to change and alter individual loans, they can omit origination fees to seem attractive.
But private student loans typically come with higher interest rates than federal ones. Always read the terms of your loan thoroughly before signing on the dotted line.
You can depend on federal student loans to have fixed origination fee rates. While any fee will cut into the funds you receive, having a fixed rate means you can accurately plan for the amount of money you will get and how much you will be charged.
A breakdown of federal loan origination fees
For Direct Stafford Loans, both subsidized and unsubsidized, the origination fee is 1.069 percent of the total amount of the loan. The fee applies to undergraduate and graduate students.
So, if you have a Direct Stafford Loan of $5,000, you will receive $4,946.55. That’s because $53.45 of the $5,000 loan amount is your Direct Stafford Loan origination fee.
The rate is higher for a PLUS loan origination fee: 4.276 percent of the total amount of the loan. If you were to take out $5,000 in PLUS loans, you’d pay a $213.80 loan origination fee and receive $4,786.20 to pay for school.
How do loan fees impact your college budget?
It’s important to note that a federal student loan origination fee is applied to the balance you request and deducted from those funds. That means you’ll receive less than you selected when applying.
To make sure you have enough funds to cover your costs, you should take this fee into account and request slightly more than you will need. You can find out the balance you should ask for with the following formulas:
- Amount you should request for Direct Unsubsidized/Subsidized Loans = Loan amount you want / .98931
- Amount you should request for PLUS loans = Loan amount you want / .95724
So, if you need $5,000 to cover your costs for a semester, you should request the following amounts:
- $5,054 for Direct Unsubsidized/Subsidized Loans
- $5,223 for PLUS loans
After October 1, 2017, the loan fees might rise slightly as the Department of Education makes annual adjustments.
But these increases are typically small (a matter of cents for most loans), and the above loan fees will apply to all student loans disbursed before then, such as at the beginning of the fall 2017 semester.
How does a student loan origination fee impact your repayment?
As a borrower, however, you should know how borrowing more to cover an origination fee could affect your repayment. This fee will add to your initial balance, and this will result in higher interest throughout repayment.
For instance, a single unsubsidized loan of $5,000 will accrue $223 in interest each year the student is enrolled in school and deferring payments.
Here’s a comparison of how this loan fee impacts costs over the life of the loan if a student borrows $10,000 a year ($5,000 a semester). Calculations assume the current federal loan fee of 1.069 percent and interest rate of 4.45%.
At graduation, as you can see, these loan fees add $480 between initial costs and interest up to that point. And over 10 years of repayment, the total cost grows to $596.
That doesn’t seem like much, but it’s more than a month’s worth of payments.
The loan fees and interest rates are even higher for PLUS loans. Here’s what the same balances would look like for Parent PLUS or Grad PLUS loans with an interest rate of 7.00% and a loan fee of 4.276 percent.
You can see the impact of the loan fee here, which results in a student loan balance that’s $1,900 higher. Combined with higher interest rates, the difference at graduation comes out to $2,235. After 10 years of payments and interest, the total cost difference is $3,240.
Hopefully, your loan fee won’t make or break your student loan repayment. But it’s important to consider it and understand how it can cost more both now and in the long run.
It also highlights the importance of utilizing federal student loans with lower fees before turning to more expensive options like Parent PLUS and Grad PLUS loans.
Always account for a loan origination fee beforehand
At the end of the day, you can’t get around a loan origination fee if you choose to use the federal student loans that charge them.
The important thing is to be aware that the amount you borrow won’t be the amount you receive.
Knowing this ahead of time will save you the panic of wondering where that extra $100 went. It will also help you prepare to pay any expenses this loan origination fee gap may cause.
You’ll also want to limit your borrowing – the smaller your initial balance, the lower your loan fee and the less interest you’ll pay over time.
Even though it may seem like a small amount, always account for the loan origination fee. That way, you’ll know for certain that you have the funds necessary to pay for tuition and other school-related expenses.
Lauren Bowling contributed to this article.
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