Even after calculating the cost of principal and interest, you may still be looking for student loan surcharges.
Some student loans have application and surrender fees, and late fees and repayment fees can quickly add up. However, there are ways to avoid most student loan fees.
Some lenders charge origination fees for their student loans, which may surprise customers by disbursing less money than the entire amount borrowed or may mislead them when comparing various student loan options.
We must first comprehend what origination fees are in a student loan in order to analyze them.
A processing fee is a fee charged on student loans (Bundeseltern PLUS loans and all other federal loans) in exchange for processing and disbursing the loan.
The Bundeseltern-PLUS loan initiation fee is approximately 4.2% of the loan amount you borrow for your child.
For example, if you take out a $40,000 PLUS parent loan, the processing fee will be $1,680.
Private student loans such as Citizens Bank do not charge a parent processing fee for student loans.
So how do loan fees affect how much you borrow to pay for your child’s education?
And why should parents take out student loans that charge their children a processing fee when other lenders don’t?
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What are Student Loan Fees?
A student loan fee is a fee (either a percentage or a flat rate) for borrowing or delinquent loans.
Both private and state student loans may have fees, but they usually have different types of fees.
Some of the fees you can expect from student loans include:
Student Loan Origination Fee
Before your loan is issued to you, origination fees, which are determined as a percentage of your total loan amount, are deducted.
Origination fees are presently 1.057 percent for Direct Unsubsidized and Subsidized Loans and 4.228 percent for Direct PLUS Loans on all federal student loans.
Additionally, origination costs may be assessed by some private lenders.
With student loans, fees are charged by the lender when issuing or processing the loan. These are called processing fees.
Processing fees are found on both government student loans and some private student loans.
This means that the loan fee will be deducted proportionally from each loan payment. In other words, it will be less than you actually borrow.
However, students who take out one of these loans are responsible for repaying the full amount of the loan, so they must also repay the incorporation fees.
Of course, there is interest on the entrance fee, and taking out a new student loan means that you will be charged a new entrance fee for the amount of the new loan.
So even a small origination fee can be devastating as the cost increases over time.
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If you don’t pay the required minimum amount by the due date, late fines could be applied.
Although some lenders offer a grace period of up to 15 days, they are often charged the day after the payment was due.
It might be a set rate or a percentage of the debt, although it often ranges from $5 to $25.
Returned Check Fee
This cost, which is also known as an “insufficient funds fee” or “payment return fee,” is assessed if your account is insufficiently funded or if your check bounces.
Depending on the lender, it may be expressed as a fixed cost or a percentage of your loan balance, but often it comes to about $20.
You should carefully read the small print before signing your loan agreement because some prospective student loan fees might not be disclosed on a lender’s website.
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How do Origination Fees impact how much you borrow?
Student loan processing fees can be claimed in two ways:
- the amount of the fee is added to the principal of the loan, or
- Fees will be deducted from the loan amount
If you take this $40,000 Federal Parents PLUS Loan and a $1,680 initiation fee is added to your loan principal, your loan principal will be $41,680, plus an additional $1,680 in interest, and you will only receive $40,000 in payments.
However, after deducting the processing fee from the amount borrowed, the amount borrowed is $40,000, but you only receive $38,320 for the first withdrawal.
As you can see, charter fees can add to the overall cost of the student loan you borrow for your child.
How Student Loan Fees Affect your Payments
Borrowing fees can have a big impact on how much you borrow and how much you borrow. For one thing, the amount you get when you take out a federal loan is not the approved amount.
For example, if you requested $10,000 and were charged an origin fee of 4.228%, you would only get $9,577.20, but you would still have to pay back $10,000 in full.
This may mean that you will need to take out an additional loan to cover your full school expenses if your original loan falls short.
Late or insufficient insurance premiums may also be added. If the lender charges a late payment of $25, just four missed payments a year add $100 to your loan repayments.
To avoid this, we recommend setting up automatic payments so you don’t have to rely on calendar reminders.
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Federal vs. Private Student Loan Fees
There are some significant differences between government and private student loan fees. Most importantly, many private lenders have eliminated origination and application fees, and origination fees are now levied on all federal loans.
Some private lenders like SoFi have also eliminated other common fees such as late fees.
At first glance, this might seem like a win-win situation between personal and federal loans. However, fees don’t tell the whole story.
Federal student loans come with many benefits and aids that can help you in an emergency, such as the suspension of current payments as a result of the coronavirus pandemic.
Private student loan providers offered emergency assistance in the first few months, but it was on a case-by-case basis and not all were eligible. The borrower’s payment obligations resumed regardless.
Federal student loans charge processing fees for borrowings, but federal interest rates are fixed and usually much lower than those offered by private lenders, especially for borrowers with poor credit ratings.
For this reason, it is almost always best to start your search with a federal loan and turn to private lenders after exhausting these options.
The origination fees for private student loans will vary depending on the lender; some may charge them while others may not, and some may refer to them by a different name, such as an application fee or a disbursement fee.
Since Congress implemented origination fees for federal student loans, these fees vary according to the type of loan that is being taken out.
Why would Parents take out a Loan with an Origination Fee?
Often, college bills creep up on parents and they don’t have much time to research the various options, so they opt for federal parent plus loans without knowing the original fees.
At most colleges, the fall semester is due in July. During the summer, parents are busy with other aspects of college preparation, planning the last family vacation before their child goes to college, not knowing the due date, or paying the final tuition fee to enroll in college.
Then they find out their bills are due, and they try to apply for a federal PLUS loan for guardians. The process is quick and easy, and nearly everyone approves.
Parents try to get a loan before it’s due, so they don’t get a chance to explore all the options available upfront. They only learn later that private lenders do not charge referral fees.
These parents also didn’t know that the interest rate on the loan could go up depending on their creditworthiness.
Bundeseltern PLUS loans have a flat interest rate of 7.08% for all borrowers. Private lenders, on the other hand, base their interest rates on creditworthiness.
Interest rates can be set as low as 5% or less, and borrowers can choose between fixed and floating rates.
Also Read: How is a Student Loan Different from a Scholarship?
In exchange for processing and disbursing a student loan, including the federal parent PLUS loan and all other federal loans, an origination fee is levied. The federal parent PLUS loan origination fee is approximately 4.2% of the loan amount you obtain for your child.
Fees for origination: The costs of loan underwriting are covered by the origination fee. Though the precise amount varies by lender, this fee often amounts to roughly 1% of the overall loan amount. You can always request a reduction in or elimination of these costs from your lender.
While we recommend including fees in your comparison of private and government student loan lenders, there are other factors to consider.
View the total cost of your loan, including the total interest, monthly payments, repayment schedule, and forgiveness options.
By taking proactive measures such as setting up Autopay, for example, you may not have to worry about typical lending fees.
Parents should begin investigating their alternatives for student loans as soon as feasible. By May 1st, if not earlier, your child will decide where to attend college.
That’s when you should ideally start thinking about how you’ll pay for it so you’re not scrambling to pay for the fall semester and signing up for the federal parent PLUS loan before making sure that’s the best course of action for you.
Once more, private lenders like Citizens Bank do not charge student loan origination fees for their loans, whereas federal parent PLUS loans do.