NEW YORK (MainStreet) — Student loan fees can really add up, so much so that it’s worth looking into any deal that reduces them, or cuts them out altogether.
Thankfully, some banks and credit unions are now offering would-be collegians with student loan deals that put an end to origination fees.
Student borrowers shouldn’t take origination fees lightly. In the typical federal student loan deal (using the popular Stafford Loan as an example), loan origination fees amount to 1% of the total loan, which is better than five years ago, when Stafford Loan origination fees were as high as 3% of the total loan. But considering the fact that the maximum loan amount can be as high as $31,000 for dependent undergraduate students ($57,500 for students not claimed as dependents), that 1% fee can still add thousands of dollars to a student’s debt burden.
Loan origination fees are generally applied as a charge by the lender – either the U.S. government or a private lender like a bank or credit union – to pay for the cost of processing the loan.
For federal loans, the origination fees for 2011-12 are described below:
Direct Stafford Student Loans: 0.5% net fee
• A loan origination fee of 1.0% is deducted from the Stafford loan funds at the time of disbursement. However, 0.5% of this fee is immediately refunded back to the student borrower in the form of an interest rebate. The net cost is therefore 0.5%.
• To keep the interest rebate, you must make your first 12 monthly payments on time when your student loan enters repayment. If you do not make all 12 payments on time, the rebate amount will be added back to your loan principal.
Direct Parent PLUS Loans: 2.5% net fee
• A loan origination fee of 4.0% is deducted from the PLUS loan funds at the time of disbursement. However, 1.5% of this fee is immediately refunded back to the parent borrower in the form of an interest rebate. The net cost is therefore 2.5%.
• To keep the interest rebate, the parent borrower must make the first 12 required monthly payments on time. If the first 12 payments are not made on time, the rebate amount will be will be added back to the loan principal.
Some lenders are cutting students a break and eliminating such fees altogether. Clark, N.J. based CU Student Lending has launched a new student loan program, the EdAccess Private Student Loan, that has no origination fees. The deal is good for all loans for the 2011-2012 academic year.
The credit union, like most private lenders, is cutting fees to better compete with government lending programs, and to cut students and their families a break on high tuition costs.
“Providing credit union members and their families a private student loan product with zero origination fees, especially during a time with dramatic increases in tuition costs, is something that is extremely important to us,” notes Tom O’Shea, chairman of CU Student Lending.
Big private lenders are slashing origination fees, too. Philadelphia-based PNC Bank (Stock Quote: PNC) has cut the origination fees on its signature Solutions Loans program. If a student makes automatic payments, he or she can slice another 0.50% off the interest rates attached to the loan as well.
PNC says the cuts are about simplification, but it's really about competing with Uncle Sam.
Wells Fargo (Stock Quote: WFC) just made a similar announcement that it will also drop origination fees, offering student borrowers deeper discounts on college loans.
Students and families are much choosier on college loans, and have been leaning more toward the public sector to get them. But now private lenders are fighting back, and origination fees seem to be one of the first salvos fired in the battle for the collegiate lending dollar.
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