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Student Loans Reports

Do Student Loan Borrowers Understand Loan Fees? | LendEDU – NASFAA Collaborative Study

Updated Apr 05, 2023   |   14-min read

Even though student loan debt has climbed to an all-time high in the United States—with over $1.45 trillion outstanding—Americans somehow still have a limited grasp of the industry.

Unfortunately, with a lack of understanding comes the chance of not recognizing certain aspects of an education loan. And, when it comes to student loans, nothing goes more unrecognized than origination fees.

Loan fees were originally designed to offset the cost of the lender providing you with a student loan. Unfortunately, origination fees catch most borrowers unaware as they are not applied until the student loan has been disbursed. With some loan fees ranging as high as 4 percent of the total loan, origination fees add another expense to cash-strapped students and will result in a greater amount of money owed in repayment.

All federal student loans are tagged with an origination fee. The federal government began using these loan fees to offset the cost of subsidies offered to private lenders that issued federal student loans. However, since 2010, the government funds all federal education loans, which meant subsidies were no longer warranted. Yet, the loan fees have stayed in place, and it is estimated that the government has made $8.1 billion in revenue in the last five academic years due to these fees. 

In a collaborative study, LendEDU and the National Association of Student Financial Aid Administrators (NASFAA) sought to discover how much three different groups of federal student loan borrowers knew about these hidden loan fees. 

Full Survey Results

Part 1: Current Undergraduates With Student Loan Debt from Federal Direct Loans That Have Borrowed Within the Last Year

The following survey was administered to 500 current undergraduate students that currently have student debt from Federal Direct Loans and have borrowed within the last year. 

1. Which of the following best describes the definition of a loan fee (also known as an origination fee) for Federal Direct Loans?

a. 31.40% of respondents answered “A loan fee is a fee payable when you attempt to repay your loan early.”

b. 13.60% of respondents answered “A loan fee is a fee payable when a cosigner attempts to release themselves from the loan.”

c. 19.60% of respondents answered “A loan fee is a fee charged by The Department of Education when you have a qualifying life event.”

d. 35.40% of respondents correctly answered “A loan fee is a fee payable by the borrower that is used to help defray the costs of the Direct Loan Program.”

2. When receiving the disbursement of your Federal Direct Loans, were loan fees deducted from your Federal Direct Loans disbursement?

a. 36.00% of respondents correctly answered “Yes”

b. 20.40% of respondents answered “No”

c. 43.60% of respondents answered “Unsure”

3. For context, Federal Direct Loans have a loan fee of 1.066% as of December 2017. Do you believe that you were adequately informed of these fees before borrowing?

a. 50.60% of respondents answered “Yes”

b. 49.40% of respondents answered “No”​

4. Loan fees (also known as origination fees) were originally created to help the federal government offset the cost of subsidies offered to private lenders that issued federal education loans. Since 2010, the federal government funds all federal education loans, which meant subsidies were no longer needed; yet loan fees have stayed in place. It is estimated that the government has made $8.1 billion in revenue in the past 5 academic years because of loan fees. What are your thoughts after learning this?

a. 51.40% of respondents answered “I feel cheated by the federal government and do not believe I should have paid the loan fee.”

b. ​34.40% of respondents answered “I am grateful that I was able to fund my education via Federal Direct Loans and am OK with paying the loan fee.”

c. 14.20% of respondents answered “I have no feelings either way.”​

Part 2: Parents With Student Loan Debt from the Federal Parent PLUS Loan Program That Have Borrowed Within the Last Year

The following survey was administered to 500 parents that currently have student loan debt from the Federal Parent PLUS Loan Program and have borrowed within the last year.

1. Which of the following best describes the definition of a loan fee (also known as an origination fee) for Federal Direct Loans?

a. 22.00% of respondents answered “A loan fee is a fee payable when you attempt to repay your loan early.”

b. 16.00% of respondents answered “A loan fee is a fee payable when a cosigner attempts to release themselves from the loan.”

c. 23.20% of respondents answered “A loan fee is a fee charged by The Department of Education when you have a qualifying life event.”

d. 38.80% of respondents correctly answered “A loan fee is a fee payable by the borrower that is used to help defray the costs of the Direct Loan Program.”

2. As a parent who borrowed from the Department of Education using Federal Parent PLUS Loans, were loan fees deducted from your Federal Parent PLUS Loans disbursement?

a. 47.60% of respondents correctly answered “Yes”

b. 20.60% of respondents answered “No”

c. 31.80% of respondents answered “Unsure”

3. For context, Parent PLUS Loans have a loan fee of 4.246% as of December 2017. Do you believe that you were adequately informed of these fees before borrowing?

a. 58.40% of respondents answered “Yes”

b. 41.60% of respondents answered “No”​

4. Loan fees (also known as origination fees) were originally created to help the federal government offset the cost of subsidies offered to private lenders that issued Federal Parent PLUS Loans. Since 2010, the federal government funds all Federal Parent PLUS Loans, which meant subsidies were no longer needed; yet loan fees have stayed in place. It is estimated that the government has made $8.1 billion in revenue in the past 5 academic years because of loan fees. What are your thoughts after learning this?

a. 45.20% of respondents answered “I feel cheated by the federal government and do not believe I should have paid the loan fee.”

b. ​41.20% of respondents answered “I am grateful that I was able to fund my education via Federal Parent PLUS Loans and am OK with paying the loan fee.”

c. 13.60% of respondents answered “I have no feelings either way.”​

Part 3: Current Graduate Students With Student Loan Debt from Federal Direct Unsubsidized Loans That Have Borrowed Within the Last Year

The following survey was administered to 500 current graduate students that currently have student loan debt from Federal Direct Unsubsidized Loans and have borrowed within the last year.

1. Which of the following best describes the definition of a loan fee (also known as an origination fee) for Federal Direct Loans?

a. 24.40% of respondents answered “A loan fee is a fee payable when you attempt to repay your loan early.”

b. 13.40% of respondents answered “A loan fee is a fee payable when a cosigner attempts to release themselves from the loan.”

c. 20.20% of respondents answered “A loan fee is a fee charged by The Department of Education when you have a qualifying life event.”

d. 42.00% of respondents correctly answered “A loan fee is a fee payable by the borrower that is used to help defray the costs of the Direct Loan Program.”

2. When receiving the disbursement of your Federal Direct Unsubsidized Loans, were loan fees deducted from your Federal Direct Unsubsidized Loans disbursement?

a. 37.60% of respondents correctly answered “Yes”

b. 19.40% of respondents answered “No”

c. 43.00% of respondents answered “Unsure”

3. For context, Federal Direct Unsubsidized Loans have a loan fee of 1.066% as of December 2017. Do you believe that you were adequately informed of these fees before borrowing?

a. 49.40% of respondents answered “Yes”

b. 50.60% of respondents answered “No”​

4. Loan fees (also known as origination fees) were originally created to help the federal government offset the cost of subsidies offered to private lenders that issued Federal Direct Unsubsidized Loans. Since 2010, the federal government funds all Federal Direct Unsubsidized Loans, which meant subsidies were no longer needed; yet loan fees have stayed in place. It is estimated that the government has made $8.1 billion in revenue in the past 5 academic years because of loan fees. What are your thoughts after learning this?

a. 50.20% of respondents answered “I feel cheated by the federal government and do not believe I should have paid the loan fee.”

b. ​32.20% of respondents answered “I am grateful that I was able to fund my education via Federal Direct Unsubsidized Loans and am OK with paying the loan fee.”

c. 17.00% of respondents answered “I have no feelings either way.”​


Observations & Analysis

Room for Improvement When it Comes to the Basic Understanding of Loan Fees

As noted in the introduction of this report, a lack of understanding when it comes to loan fees could lead to trouble for borrowers. It is important to know what a loan fee is before you make the decision to take out a federal student loan. 

If potential borrowers know what loan fees are beforehand, they will not be wondering where that $100 went when the student loan is disbursed. Having a pre-knowledge of loan fees can save borrowers undue financial stress by both saving in preparation for the fees and by limiting the size of their loan balances.

When it came to our three respondent pools, the plurality from each group was able to correctly identify the definition of a loan fee for Federal Direct Loans. However, there was not a majority from any of the groups, and many borrowers were scattered in wrongly defining what an origination fee was. 

Majority of Each Group Did Not Know Loan Fees Were Deducted From Their Loans (Hint: They Were!)

Loan fees, or origination fees, are not taken out when the borrower applies for the loan, but at the time the loan is disbursed to the borrower. Because of this, and also due to a general lack of understanding when it comes to loan fees, student debtors are often blindsided when the loan fee kicks in. 

>> Read More: How Do Student Loans Work?

Well, they are either blindsided or the loan fee charge simply slips their attention. According to the results our three surveys, the clear majority of borrowers either wrongly said a loan fee was not deducted when their loan disbursed or they were not sure if the loan fee was deducted.

When it comes to federal student loans, which all of our respondents had, a loan fee is deducted every single time the student loan is disbursed. Private student loans differ in that the private lender has the option of charging a loan fee.  ​

It is worth mentioning that parents, who were borrowers of Federal Parent PLUS Loans, displayed a much more keen awareness that they were being charged the fees from their loan disbursements. While still the minority, 47.60 percent of parent borrowers correctly answered “yes” when asked if the loan fee was deduced from their loan disbursement. 

Were Borrowers Aware They Were Informed About the Loan Fees? It’s About an Even Split

Interestingly, despite many of our respondents not knowing what a loan fee was and also not knowing if a loan fee was deducted from their loan disbursements, it was about an even split when we asked them if they felt adequately informed about the loan fee before borrowing. 

Forgetting if the information is adequate, all borrowers of federal student loans are informed about loan fees. The following is written on the William D. Ford Federal Direct Loan Program’s Plain Language Disclosure: “For each Direct Subsidized Loan or Direct Unsubsidized Loan you receive, we charge a loan fee that is a percentage of the principal amount of the loan. This fee will be subtracted proportionally from each disbursement of your loan and will be shown on a disclosure statement that we send to you.”

So, the borrower is informed that a loan fee will be deducted at the time of the loan disbursement, they are just not told how much that fee will be. That exact amount is provided in a disclosure statement that comes afterwords. 

By a little over one full percentage point, more undergraduates said they were informed about loan fees than those who said they were not. Going the other way by the same margin, more graduate students said they felt as though they were not properly informed regarding loan fees before borrowing than those that said they were.

Interestingly, a healthy majority of parent borrowers stated they felt adequately informed about loan fees before borrowing. From this question and the preceding one, it seems that parents are paying much closer attention to the student loan borrowing process than are our other respondent pools.

Across-the-Board, Plurality of Borrowers Feel Cheated by the Government After Learning More About Loan Fees

In their inception, loan fees were originally created to assist the federal government in offsetting the cost of the subsidies they offered to private lenders that issued federal student loans.

However, since 2010, the federal government has funded all federal student loans. This means that subsidies are no longer needed to offset the cost for private lenders. Yet still, loan fees have stayed in place, and it is estimated that the federal government has made $8.1 billion in revenue in the past five academic years because of these fees. ​

After we informed each pool of respondents about this, we asked them what their thoughts were. In all three cases, the plurality of respondents said they felt cheated and that they should not have paid the loan fee. It is important to note, however, that this response never received the majority of responses for any group. A good proportion of respondents said they felt grateful that they were able to fund their education through those loans and were perfectly fine with paying the loan fee. 

What can be taken from this is that federal student loans are an impactful resource that can open a world of opportunity when it comes to receiving a top-notch education, but borrowers should not be left in the dark as much as they are about fees. If a healthy balance can be found between borrowers and the Department of Education when it comes to loan fees, then everybody wins. 

Methodology

All data that is featured in this report derives from an online poll commissioned by LendEDU and conducted online by polling company Pollfish.

This was a collaborative study between LendEDU and the National Association of Student Financial Aid Administrators (NASFAA). Both parties consulted on the desired respondent pools and the questions. For each poll, 500 respondents were polled and 1,500 respondents were polled in total.

For each respective respondent pool, potential poll participants were screened via screener question. Each of the three screener questions only had one admissible answer that filtered for the aforementioned desired respondents and allowed them to proceed to the poll.

This poll ran over a four day span, starting on February 2nd, 2018 and ending on February 5th, 2018. All respondents were asked to answer each question truthfully and to the best of their ability. 

See more of LendEDU’s Research