Most people know that when you’re considering borrowing money for your education, it’s extremely important to take interest rates into account. But did you know that in addition to interest rates, some types of student loans also carry origination fees?
What is an origination fee?
An origination fee is a one-time fee collected at the time the loan is disbursed; it is typically a percentage of the total loan amount. This means that instead of receiving the entire amount that you borrow, you receive the amount that you borrow minus the loan origination fee.
Origination fee rates
Most types of federal student loans, with the exception of Perkins loans, carry an origination fee. The current loan origination fees in 2016 for federal subsidized, unsubsidized, and PLUS loans are as follows:
Federal Direct Subsidized Loans: 1.068%
Federal Direct Unsubsidized Loans: 1.068%
Federal PLUS Loans: 4.272%
Decoding the cost
This means that if you take out, for example, a $10,000 unsubsidized loan from the federal government, the loan origination fee will be $106.80. So instead of receiving the full $10,000, you will only receive $9,893.20.
Similarly, if you take out the same $10,000 using a federal PLUS loan, the loan origination fee will be $427.20. In this case, you’ll only receive $9,572.80.
However, in both of these cases you will still be required to pay back the full $10,000. Additionally, interest will accrue on the full amount you borrowed and not just the amount you received.
Note also that the fees listed above are the current fees for new loans and are valid until October 1, 2016, at which time they may be adjusted. Additionally, if you took out a federal student loan prior to October 1, 2015, your fee may be different. You can find more information about origination fees on federal student loans at the StudentAid.gov website.
Private lenders don’t always charge origination fees
In contrast to the federal government, many top private lenders, such as Wells Fargo, Discover, Sallie Mae, and PNC, do not charge origination fees for loans that are applied toward study at undergraduate or graduate colleges. However, keep in mind that there may be other disadvantages to borrowing from private lenders, such as higher interest rates or a lack of the types of loan forgiveness, income-driven repayment plans or forbearance and deferment programs that are available through the federal government.
Always crunch the numbers
Origination fees are important to be aware of when considering taking out student loans. When you take out a loan with an origination fee, you will always be paying back the total amount that you borrowed, rather than the amount you received after the origination fee was subtracted, and interest will also accrue on that total amount. Although origination fees are one-time fees, they’re important to factor into your overall financial and loan repayment plan.