When it comes to student loans, an origination fee is an upfront fee charged for processing your student loan. These fees can cover the cost of processing your student loan application, underwriting the loan and funding the loan.
Origination fees are typically a percentage of your student loan’s total.
Private student loan lenders generally don’t charge an origination fee. Instead, they factor the cost of loan origination into the interest rate. However, federal loans do charge an origination fee.
As of October 2019, federal loans for undergraduate and graduate students charge a 1.059% origination fee. There is a 4.236% origination fee for Federal Parent PLUS loans and PLUS loans for graduate students. The loan fees will drop to 1.057% and 4.228% on October 1, 2020. These fees change every October, due to sequestration.
While the origination fees may seem small, they can increase the cost of the loan a lot over time. Most borrowers add the fees to their loan balance.
Alternatively, the fee could be deducted right from your loan. For example, if you borrowed $30,000 and have a 1% origination fee, your fee is $300. Instead of receiving $30,000, you may receive $29,700 but still owe the full $30,000, plus interest.
Don’t just opt for private student loans because federal loans have an origination fee. Federal loans often have a lower interest rate and other benefits, including the ability to enroll in an income-driven repayment plan, the potential for public service loan forgiveness and more generous deferment options for times of unemployment and economic hardship. Compare your options and see what is best for you.
Assuming a 10-year repayment term, 4% in loan fees is the equivalent of a 1% increase in the interest rate with no fees.
There are other fees when it comes to student loans. These can include an application fee, late payment fees and payment return fees (if you have insufficient funds in your account).
If you are considering a private student loan, compare lenders to see who is right for you.
If you have existing student loan debt, consider the pros and cons of refinancing. You may be able to lower your interest rate and save money if you choose to refinance your student loans. Keep in mind that refinancing federal student loans means you will no longer have the federal benefits that go along with it. This includes income-driven repayment plans, any federal forgiveness programs, generous deferment periods, a death and disability discharge, and more.