"The federal government makes billions of dollars a year charging students and parents fees to borrow money for college, but a group of financial aid officers say those loan origination fees are a burdensome tax on families that Congress needs to end," The Washington Post reports.
"'This does not make sense in a federal loan program,' said Justin Draeger, president of the National Association of Student Financial Aid Administrators. 'It makes sense with commercial loans because the fee covers the cost of processing the loan. That’s moot when you’re talking about a federal loan, where eligibility is determined by law. . . . Colleges are certifying the application and the federal government is just disbursing the funds.'
The association on Monday released a policy paper examining what it calls the 'hidden student loan tax.' Instead of charging fees upfront, the Department of Education subtracts the money directly from the loan amount before distributing the funds. Borrowers, nevertheless, must repay the entire loan amount, plus interest. Those fees amount to 1.06 percent of the total borrowed by an undergraduate student, and 4.2 percent for parents and graduate students.
If a freshman borrows $4,124 — the average amount issued to students — the department withholds $43.96 as the origination fee but expects the student to repay the full amount of $4,124, plus interest. If parents of that freshman or if an older sibling pursuing a doctoral degree turned to the federal government for a loan of $23,986, that would translate into a $1,022.76 origination fee.
Because interest accrues on those fees, the association estimates that an undergraduate borrower in a four-year program will pay about $235 on $166 in origination charges if enrolled in a standard 10-year repayment plan. Meanwhile, the average graduate student in a two-year program will face about $1,145 in fees and interest if repaying over 10 years."
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Publication Date: 11/21/2017