Student Loan Origination Fees Changing Soon

When it comes to the student loan process, many aspects can catch borrowers off guard. One of the biggest surprises is that the amount you borrow is not actually the amount you receive.

And soon, that amount will be slightly smaller.

The Budget Control Act of 2011, also known as the sequester law, lifted the debt ceiling. This legislation lowers the budget in a series of steps, so absent of Congress taking additional action, it will continue to affect government costs annually until 2021. Those costs, of course, include different aspects of the federal student aid program.

In addition to affecting student loan origination fees, which are set to rise slightly this year, the Budget Control Act of 2011 determines the maximum value of two federal grants for students: Iraq-Afghanistan Service and TEACH grants. Both will also decrease slightly beginning Oct. 1.

Student Loan Origination Fees

Lenders often charge a fee to originate, or issue, a student loan. They subtract this origination fee directly from the loan funds before disbursing them to you, the borrower. You still repay the entire loan amount, though.

For private student loans, origination fees vary from lender to lender. Some may omit these fees altogether. Others may omit them but include additional fees for the application, prepayment or extra services. Read your student loan agreement closely for these terms before signing.

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Origination fees are the only fees associated with today's federal student loans. Federal law dictates the fee amount.

For subsidized and unsubsidized student loans, the fee is 1.068 percent. For PLUS student loans, the fee is 4.272 percent.

For example, if you borrow $10,000 in unsubsidized student loans, you would receive $9,893.20 in funds with your lender -- in the case of all federal student loans today, the lender is the federal government -- receiving the remaining $106.80 as its origination fee. For the same amount in PLUS student loans, you would receive $9,572.80 and your lender would receive $427.20.

Beginning Oct. 1, these fees will rise -- but only slightly. For subsidized and unsubsidized student loans, the fee will now be 1.069 percent, a change of 0.001 percent.

PLUS student loans will increase slightly more -- 0.004 percent -- to 4.276 percent. Using our examples above, these changes mean you would receive $9,893.10 and $9,572.40, respectively, for $10,000 worth of unsubsidized student loans and PLUS student loans.

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In the example, these changes subtract pennies from the loan amount. Still, most borrowers would likely rather receive more money than their lender, even if it is just a few cents.

Grant Amounts Affected

For grants first disbursed after Oct. 1, the maximum amount you can receive will be 6.9 percent less than the statutory maximum allowed by law. While that sounds like a steep decrease, it is actually a drop of only 0.1 percent year over year -- and still a nice increase from the 7.3 percent decrease required two years ago.

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To use real-world numbers, the statutory maximum Iraq-Afghanistan Service Grant is $5,815. Currently, students can receive up to a maximum of 6.8 percent less than that amount or $5,419.18. Beginning Oct. 1, that maximum will change to $5,413.77 -- roughly $5 less.

For TEACH grants, the statutory maximum is $4,000. At 6.8 percent less than that amount, borrowers can currently receive up to $3,728. When the Oct. 1 changes take effect, that number will dip to $3,724.

As with the origination fees, the changes hardly seem dramatic from a financial standpoint. Still, when determining how you are going to pay for next semester, it is important to know exactly how far your loans and grants will get you.

Ryan Lane is the senior editor for American Student Assistance, where he oversees the financial website saltmoney.org and serves as the editor of the SALT Blog. He graduated from Syracuse University with a B.S. in journalism.