Sen. Mike Braun (R-Ind.) on Tuesday reintroduced legislation that would amend a section of the Higher Education Act (HEA) and eliminate origination fees on federal direct student loans, which he says “adds unnecessary debt to student borrowers and worsens our national debt posture.”
Currently, the HEA, as amended, specifies a loan origination fee of 1% for all direct subsidized loans and direct unsubsidized loans, and a fee of 4% for all direct PLUS loans for both parent, graduate, and professional student borrowers. Origination fees are adjusted annually due to sequestration.
For example, if a student borrows an unsubsidized loan of $4,090, which was the average annual loan amount in 2019-20 for undergraduates, $43.31 is withheld by the Department of Education (ED). While the student only receives $4,046.69 of the loan, that student is responsible for repaying the full $4,090, plus the interest on that amount, which accrues both during school and in repayment.
As NASFAA and Braun both note, origination fees existed to offset the costs of federal student loans by bank-based private-sector partners, a system which no longer exists since the Federal Family Education Loan (FFEL) Program ended in 2010. Braun’s legislation, titled as the “Student Loan Tax Elimination Act,” is cosponsored by several senators, including Sens. Kyrsten Sinema (I-Ariz.) Elizabeth Warren (D-Mass.), Josh Hawley (R-Mo.), Tim Kaine (D-Va.), Chris Coons (D-Del.), and Chris Van Hollen (D-Md.).
“We should do what we can to ease the burden on American students, and removing this unnecessary tax on student borrowers won’t cost a thing,” Braun said in a statement. “I’m proud to lead this bipartisan bill to eliminate a tax that is not good for borrowers or taxpayers.”
NASFAA has noted that student loan origination fees generated $1.7 billion in revenue for the federal government in award year 2019-20, and $6.7 billion over the past four award years. Additionally, NASFAA has estimated the average undergraduate borrower in a four-year program is estimated to pay $239 in origination fees and associated interest if enrolled in a standard 10-year repayment plan, while the average graduate student in a two-year program is estimated to pay about $1,334 in origination fees and interest if repaying over 10 years.
“Continuing your education after high school is supposed to be a pathway to economic opportunities, but millions of working people are getting crushed by debt,” Warren said in a statement. “Eliminating loan origination fees is a common-sense step Congress can take to help alleviate the burden of student debt for American families.”
NASFAA President and CEO Justin Draeger praised the legislation, saying student loan origination fees create a complex and unnecessary financial burden for students.
“Student loan origination fees are a relic of bank-based lending and have created a complex and unnecessary financial burden for students. Eliminating them will not only decrease the cost of college for students, but will also help students and families better understand the student loan program," Draeger said. "Finding bipartisan agreement can be tough in D.C., but lawmakers from across the political spectrum agree: origination fees stand in clear opposition to the overwhelming congressional support for simplification, transparency, and affordability in the federal student aid system."
Rep. Lloyd Smucker (R-Penn.) introduced the companion legislation in the House and says he looks forward to advancing the House bill.
“Students and parents should fully understand the terms and costs associated with borrowing for their education,” Smucker said in a statement. “Loan origination fees are a hidden tax which ultimately inflate costs for students. Eliminating this fee would be a step in the direction of lowering the cost of higher education for students across the nation.”
Publication Date: 3/30/2023