End This Unfair Tax on Student Loan Borrowers!
The persistent but gratuitous idea that there is a national student debt crisis is hard to escape these days. It’s surprising, then, that there has been little effort put toward ending the tax levied against students and parents the second they take out a federal student loan.
It’s a little known fact, but each time a student or parent takes out a federal loan, the government deducts an “origination fee,” which is a pre-set percentage of the total loan amount. For the current academic year the fee amounts to 1.069% for Federal Direct Loan borrowers and 4.276% for Parent and Graduate Federal PLUS Loan borrowers.
A student who takes out a $3,000 Federal Direct Loan will have $32.07 deducted from his or her loan disbursement. A parent or graduate student who takes out a $10,000 PLUS Loan, for example, would actually only receive $9,572.40. Despite the fact that borrowers never receive that money, they are responsible for repaying the entire amount of the loan, plus interest.
Of course origination fees are nothing new in the world of lending and borrowing. The term “fee” implies that the funds will be used to offset some administrative cost of the program. But these “fees” didn’t always exist on federal student loans. They were introduced in the 1980s to support the Federal Family Education Loan (FFEL) program, which existed when private lenders made federally guaranteed loans to students. At the time, the origination fees were established as a temporary way to help offset federal subsidies that incentivized lenders to participate in the federal program.
The original reasoning loses credibility when one considers that all federal student loans are now originated entirely by the federal government. The FFEL program ceased to exist in 2010, but the federal government continues to collect this money from the pockets of students and parents.
Related: Why the Next President Should Forgive All Student Loans
What’s more, federal student loans are meant to be a financial aid tool that helps promote access to cash-strapped students and families. Loan fees that reduce the amount of money students receive only complicate an already complicated system and taxes the very students the federal financial aid programs seek to help. We can no longer call this a fee, but rather a tax on those who need the most help to pay for college.
The concern over student debt is much larger than any one issue, and we have a responsibility to find solutions to help those students who are truly struggling. But at a time when sweeping reforms have not been politically possible, we can focus on making even simple changes that would have quantifiable benefits to student and parent borrowers.
Justin Draeger is the president and CEO of the National Association of Student Financial Aid Administrators.
