Student Loan Tax Elimination Act Introduced in Senate
A new bill in the Senate, the Student Loan Tax Elimination Act, would eliminate student loan origination fees on federal loans. If approved, the measure could save borrowers billions over the next five years. Supporters say that origination fees on student loans amount to a “hidden tax” on student loan borrowers. And since the Department of Education took over all federally guaranteed lending, bill supporters argue that there is no longer any reason for these fees to exist. They add no value for the borrower or taxpayer.
What are origination fees?
Origination fees are costs lenders charge when they disburse a loan. These fees compensate them for the direct cost of handling and processing the loan application and the cost of issuing the loan.
All lenders have costs – from staffing to technology to office space and supplies. Loan processing costs money. However, some private lenders don’t charge origination fees. They just work that cost into the interest rate on the loan. Nevertheless, all federal loans except for medical professional loans currently impose origination fees.
How much are origination fees?
Currently, the federal origination fee is 1.062% for direct unsubsidized loans to graduate and undergraduate students. The fee is 4.248% for Direct Parent PLUS loans and Direct Graduate/Professional PLUS loans.
On average, undergraduates pay about $294 in origination fees and interest on those fees over a standard 10-year repayment plan. Over ten years, the average graduate student in a two-year program will pay about $1,174 in origination fees and interest.
Originally, these fees existed to offset the government’s cost of subsidies to private lenders. But the Obama Administration removed private lenders from the federal student loan equation eight years ago.
Nevertheless, the government has continued to impose origination fees. All told, origination fees on student loans generated $1.7 billion for the federal government in the 2017-18 award year and $8.3 billion over the past five years.
“Origination fees stand in clear opposition to the overwhelming congressional support for simplification, transparency, and affordability in the federal student aid system,” wrote the National Association of Student Loan Administrators in a recent policy brief. “These fees, a relic of the increased cost to operate federal student loans under the defunct bank-based student lending program, now work solely as a federal budget deficit reduction tool.”
How it works
Normally lenders subtract the origination fee from your loan before they cut the check. In the case of federal student loans, the government gets the money. Not you, and not your educational institution.
But you still have to pay the interest on it.
“To most parents and students, the fees can often be a surprise,” says Euland Rumsey, a financial aid administrator from Howard University. “For students who borrowed $20,000, they are expecting the entire $20,000 applied to them. With these origination fees that doesn’t happen.”
All told, origination fees on student loans generated $1.7 billion for the federal government in 2017-18. Moreover, they also cost borrowers $8.3 billion over the past five years.
The Student Loan Tax Elimination Act has attracted support from both sides of the aisle. Early sponsors include Senators Rick Scott (R-FL), Mike Braun (R-IN), Kyrsten Sinema (D-AZ) and Chris Coons (D-DE). The Student Loan Tax Elimination Act is currently in the Senate Committee on Health, Education, Labor, and Pensions.
Support for the Student Loan Tax Elimination Act
The Act also has the support of the National Association of Student Financial Aid Administrators.
“We applaud Sens. Braun, Sinema, Scott, and Coons for putting forward a bipartisan legislative fix to end the hidden student loan tax,” said NASFAA President and CEO Justin Draeger. “A longtime priority of financial aid administrators, eliminating origination fees will decrease the cost of college and increase student and parent understanding of the federal student loan program. We call on all members of Congress to join the growing bipartisan movement to eliminate these hidden fees.”
What about my existing loan?
The Student Loan Tax Elimination Act would have no effect on existing loans. The bill only affects loans with a first disbursement date on or after July 1, 2019. Or in the case of federal consolidated direct student loans, for loans with applications received on or after that date.
Read More About Student Loan Developments in Washington
Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.