Tuesday, November 26, 2013 12:42 PM
The Gift That Keeps on Giving- Sequestration and Loan Fees
You remember sequestration don’t you? That hot topic that everyone was talking about at the start of the year and now is very rarely mentioned. Well just because we’ve forgotten about it doesn’t mean it has forgotten you. And to make sure that it stays on our radar, it’s just given all of you a reminder… yet another increase in your loan origination fees.
Let’s back up a little with a few basics on origination fees in general. What are they? How do I pay them? Why do I pay them? Origination fees on student loans were initially imposed by Congress in the mid 1980’s as a “temporary solution” to budget issues and to reduce the cost of running the federal student loan program.
So fast forward thirty years and the temporary fees are still in place. According to the Department of Education Federal Student Aid website “the loan fee is an expense of borrowing one of these loans”. The fee, based on a percentage of the amount of each loan, is directly deducted from your actual loan disbursement. You may have noticed that the amount of loan funds initially awarded by the financial aid office differs from the amount that show up on your SIS account- that difference (the gross to the net) accounts for the origination fee that automatically comes out of the disbursement. But…. In terms of repayment, you are responsible for the full (“gross”) amount of the loan including the fee that never actually disburses to you.
This is why the issue of origination fees increasing might become a concern for you. Because as these fees increase, you will have less net funds to actually apply toward your costs while enrolled and higher debt afterwards.
So back to sequestration, resulting from the Budget Control Act of 2011, the automatic budget cuts under the “sequester” impacted federal student aid programs in a variety of ways one of which was an increase in the loan origination fees. Most students saw the first increase in these fees at the beginning of this academic year when the Direct Unsubsidized loan fees jumped from 1.0% to 1.051% and (more significantly) the Grad Plus jumped from 4.0% to 4.204 %. But those increases were only year one of the Sequester, applied during the middle of federal fiscal year 2013. Now they are quickly being followed by year 2 which further increases the fees from 1.051% to 1.072% on the Direct Unsubsidized loan and from 4.204% to 4.288% on the Grad Plus.
The new increase in fees will impact any “new” loans disbursed after December 1, 2013. So if you have an academic year loan awarded last summer for which a fall disbursement has already been made and a spring disbursement is pending – your fees will not change between the two disbursements- it’s still considered one pre-existing loan. BUT if you initially declined all your loans and are now deciding to accept them for Spring - those new loans would be subject to the increased fees. In addition, if you choose to increase an existing loan – that increase (because it’s recorded as a separate loan on your loan portfolio) would be subject to the new fees.
What is the increase actually costing you? For a $25,000 Grad Plus loan the total origination fee based on the new 4.288% means that $857.60 would come right out of your loan disbursement immediately. But you are still obligated to pay back that $857.60 as part of your total loan debt … which based on a 10 year repayment schedule at the current Grad Plus interest of 6.41% equates to a repayment of $1164.38 on those fees alone. Put yourself on the 25 year repayment plans and now those same fees cost you $1,723 over the life of your loan. Again, all for monies that you never have your disposal but for which you then pay back with interest.
So what happens next… when will the next hike in the origination fees happen given the fact that Sequestration is a 10 year process? Ah… for that question my trusty Magic 8 Ball shows a reply of “Cannot predict now”.
Filed under: loans, law, financial aid, debt