Most student-loan borrowers aren't familiar with loan origination fees, and that's a problem.
The fact is, loan origination fees can climb as high as 4% of your total student debt, with Uncle Sam cashing in to the tune of $8.1 billion in such fees in the past five years, according to a new report by Lend EDU and National Association of Student Financial Aid Administrators.
Is there a good way to recognize and curb student loan origination fees? In many ways, yes, but it takes some knowledge and creativity to tamp down the onerous effects of student loan origination fees.
For starters, college loan borrowers have work to do in dealing with loan fees, according to the Lend EDU and NASFAA study. Unfortunately, that seems to be a problem, too.
This from the study:
- Only 38.73% of our respondents could correctly identify the proper definition of a loan fee.
- 64% of undergraduate respondents either did not think loan fees were deducted from their loans or were unsure. All federal loans have fees, so all respondents were subjected to loan fees.
- 47.20% of respondents did not believe they were adequately informed about loan fees before borrowing.
- 49.13% of respondents felt cheated by the federal government for having to pay an unnecessary loan fee and believe they should not have paid the fee.
As a result, defining student loan origination fees is mandatory for borrowers looking to cut their debt burden.
"Student loan origination fees are effectively a form of prepaid interest," says Mark Kantrowitz, a student loan expert and/or the publisher of Private Student Loans.guru web site. "A loan with a 4% origination fee is about the equivalent of a loan with no fees but 1 percentage point higher interest rate, assuming a 10-year repayment term."
The current loan fees on federal loans are 1.066% on the Federal Stafford loan and 4.264% on the Federal PLUS loan, and these fees are not optional, Kantrowitz says. But borrowers do have options.
"These days, most private student loans do not have any loan fees," he states. "The problem, though, is the cost of private student loans tends to be more expensive than federal student loans, even considering the fees, unless you have excellent credit. The federal student loans are also more available and have better repayment terms."
Help may be on the way with The PROSPER Act, which is the U.S. House of Representatives version of legislation to reauthorize the Higher Education Act of 1965. "That would create the Federal ONE Loan to replace the Federal Stafford and PLUS loans, and this new loan will have no fees," Kantrowitz adds.
For now, the best way to mitigate student loan origination fees is to shop around, other student loan experts say.
"Some lenders charge origination fees, some do not, and unfortunately the federal government does," says Debbie Schwartz, a student loan expert and manager of Facebook's largest student loan group, Paying for College 101. "Families really need to do the math and understand the total cost of a loan. This includes all the interest they will pay over the number of years they plan to carry the loan, plus the origination fee."
Student loan borrowers can also experience some sticker shock as loan amounts accrue heavy interest.
"If an origination fee is rolled up into the loan, when it comes time to repay, those origination fees will accumulate interest along with the rest of the loan," says Elaine Griffin, senior contributor and communications specialist at Edvisors. "That means borrowers aren't paying back those fees dollar for dollar, they are paying them back dollar for dollar-plus-interest."
Griffin offers the following tips to better handle student loan fees:
- Shop around before you take out any student loan. "Just because you are presented with certain options, it doesn't mean that other options do not exist," Griffin advises. "Do some research and determine what makes most financial sense for you."
- Origination fees will typically be a percentage of the amount borrowed. That means "your origination fee will be tied to the total amount borrowed," she states. "Although you should always ensure you are only borrowing what you need, this may be an extra push to help you borrow less."
- Pay the origination fees right away. "Once you receive any loan funds, pay off the origination fees if you can. "Student loans do not have prepayment penalties, so don't let these fees accumulate interest," Griffin notes.
There's no perfect way to eliminate student loan origination fees, but with some increased knowledge and good diligence, you can certainly improve your financial situation in dealing with high fees.
So, get on top of loan origination fees now, before they grow into a bigger problem. That move could save you a big chunk of money down the road.