What are origination fees on student loans?

Are you looking to take out a student loan for your child? Then you need to know about origination fees.

An origination fee is a charge assessed to a student loan — the federal parent PLUS loan and all other federal loans — in exchange for processing and disbursing the loan. The origination fee on the federal parent PLUS loan is around 4.2% of the loan amount that you take out for your child. For example, if you took out a $40,000 federal parent PLUS loan, the origination fee would come to $1,680.

Private student lenders, like Citizens, don’t charge origination fees for their student loans for parents.

So, how do origination fees impact how much you borrow to help cover the cost of your child’s education? And why would parents take out a student loan for their child that has an origination fee when other lenders don’t charge one?

Let’s dive into those questions.

How do origination fees impact how much you borrow?

Origination fees on a student loan can be charged in one of two ways:

1. The fee amount is added on top of your loan principal, or
2. The fee amount is subtracted from the amount you borrow

If you take out that $40,000 federal parent PLUS loan and had the $1,680 origination fee added to the loan principal, you’d have a loan principal of $41,680, incur interest on the extra $1,680, and only receive $40,000 in disbursements.

However, if you had the origination fee subtracted from the amount you borrowed, then you’d have a loan principal of $40,000 but only receive $38,320 in your first disbursement.

As you can see, origination fees can increase the total cost of the student loan you take out for your child.

Why would parents take out a loan with an origination fee?

Often, it’s because the college bill sneaks up on parents, they don’t have a lot of time to research different options, and therefore they pick the federal parent PLUS loan without knowing about the origination fee.

Most colleges have a payment due date in July for the fall semester. During the summer, parents can get caught up in other aspects of preparing for college, scheduling any final family vacations before their child goes off to college, or could just be simply unaware of the due date, or waiting for final tuition to be set by the university. Then, they find out the bill is due soon and race to apply for a federal parent PLUS loan because the process is quick and easy, and almost everyone gets approved.

Because parents are racing to get their loan before the payment deadline, they don’t have a chance to research all of their available options upfront. They wouldn’t know until later that private lenders don’t charge an origination fee.

These parents also wouldn’t know that, depending on their credit score, they could’ve possibly received a better interest rate on their loan. Federal parent PLUS loans have a standard 7.08% fixed interest rate for all borrowers. Private lenders, on the other hand, determine your interest rate based on creditworthiness. Rates can be 5% or even lower, and borrowers have fixed and variable interest rate options to choose from.

In closing…

The moral of the story is this: Parents should start looking into student loan options as soon as possible. Your child will make their college decision by May 1st or sooner. Ideally, that’s when you should start figuring out how you’ll pay for it; then you’re not rushing to get the fall semester paid for and therefore sign up for the federal parent PLUS loan without first checking to see if it’s the best option for you.

Again, federal parent PLUS loans charge an origination fee for all borrowers, while private lenders, like Citizens, do not. 

Be ready to help fund your child’s education

The Citizens Student Loan® for Parents could help make paying for your child’s education affordable, easy, and flexible.

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Did you take out a federal parent PLUS loan already? Then a Citizens Education Refinance Loan for Parents might make sense for you.