A new policy brief from the National Association of Student Financial Aid Administrators’ (NASFAA) is urging the federal government to get rid of what they called the “hidden student loan tax.” This “tax” is known as the origination fee.
Whenever a borrower takes out a new federal loan, the Department of Education withholds a percentage of the loan amount, taken as a fee for originating the loan, and then distributes the rest of the funds to the borrower.
While a student loan borrower does not receive 100 percent of his or her student loan disbursement, the borrower is still on the hook for 100 percent of the loan plus interest. Currently, there is a 1.06 percent fee for undergraduates and a 4.2 percent fee for graduate students.
In 2016, the federal government earned $1.6 billion in origination fees according to the policy brief, and over the last five years, the government has made $8.1 billion. The NASFAA estimated that the typical undergraduate and graduate student pay up to $235 and $1,145, respectively.
Back in the 1980s, these origination fees were implemented to offset the cost of student loan origination when private banks were issuing loans.
However, in 2010, the Department of Education took over student loans and started issuing student loans. While private banks got pushed out of the business, the origination fees stuck around which NASFAA argues are no longer necessary.
NASFAA President Justin Draeger announced the group’s findings and referred to the fees as an “unnecessary and outdated tax.” He continued, “It is unconscionable that the average undergraduate student will pay $235 in origination fees and associated interest over 10 years on an artifact of the prior loan system,” Draeger said.
These fees may not cause an immediate problem for most borrowers; in fact, they may not seem significant from an initial financial standpoint. After all, a $43 fee seems relatively small in comparison to a $4,000 loan.
But for many borrowers, origination fees are just one more obstacle to paying down their debt. And considering that many borrowers have interest rates above six percent, these fees do add up over the life of the loan.
The student loan origination fees likely impact the students with excessively high student loan debt the hardest. 44 million borrowers currently owe $1.4 trillion in student loan debt, and eliminating student loan origination fees would mean one less burden among many others.
Author: Andrew Rombach
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