Federal budget cuts force student loan fee hikes

Sequestration cuts from the Budget Control Act of 2011 will continue to bite students and parents borrowing to pay for college, according to a report from Clare McCann at Forbes Magazine.

The Federal Department for Education announced today that student loan origination fees will slightly increase for all loans taken out after October 1, 2014. The fee increases to 1.073 percent from 1.072 percent for Stafford loans, which are need-based subsidized loans; and to 4.282 percent to 4.292 percent on federal PLUS loans, which are non-need based (and have higher interest rates).

Origination fees are the one-time fee charged for processing a new student loan. The government rolls the fee into the loan balance and charges interest on it on the same rates that the rest of the loan accrues.

The coming increase seems quite small—it works out to about a nickel increased fees for the maximum Stafford loan – but the nominal fee rates have jumped by more than 7 percent since 2012, when the origination fees for the Stafford loan was 1 percent and 4 percent for PLUS loans.

More importantly, the law now forbids the Department of Education from waiving portions of a origination fee as a rebate for students and parents like it could before 2012. Because the rebate for Stafford loans was 0.5 percentage points and the rebate for PLUS loans and 1.5 percentage points, the effective origination fee has skyrocketed by 115 percent for Stafford Loans and shot up by 64 percent for PLUS loans.

 

Student Loan Origination Fees before and after Sequestration in 2011 Budget Control Act(source on loan rates is Department of Education)
Loan Type Effective Origination fee 2012 Effective Origination Fee 2015 $5,000 loan fee 2012 $5,000 loan fee 2015 Difference in fees: Percent increase2012-15
Stafford 0.5 % 1.073 % $25 $53.65 $27.65 114.6 %
PLUS 2.5 % 4.292 % $125 $214.60 $89.60 71.7 %

 

 

The result is an increase in fees of about $30 for every year a student takes out the maximum Stafford loan of $5,500. For students taking out an average-sized PLUS loan, which is roughly $13,000, the total damage of the increase is slightly under $250.

The culprit behind the increases is the Budget Control Act of 2011, which specified automatic across-the-board cuts to many federal programs if Congress could not agree on a package of spending cuts and increased revenues to balance the budget.

A 2014-2015 budget agreement negotiated by Senate Budget Chairwoman Patty Murray (D-Washington) and House Budget Chairman Paul Ryan (R-Wisconsin) delayed sequestration cuts for some programs, but not for student loan program.

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