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Last update: March 7, 2024

7 minutes read

What Is an Origination Fee? Demystifying the Initial Cost of Your Student Loan

Do you know what an origination fee is and how it might affect your loan? Learn how origination fees impact student loans and find smarter ways to fund your education.

By Brian Flaherty, B.A. Economics

Edited by Rachel Lauren, B.A. in Business and Political Economy


Are you in the process of securing a student loan for your child's education? If yes, you've probably come across the term “origination fee.” But, being new to college finances, you're left wondering - what is an origination fee? Simply put, an origination fee is a processing charge applied by lenders to a loan, such as a federal Parent PLUS loan.

This blog post will guide you through everything you need to know about origination fees, how they affect your loan amount, and why you should be aware of them when choosing a student loan.

Key takeaways

  • An origination fee is a processing charge applied by lenders to loans, such as the federal Parent PLUS loan
  • Although the application process is simple and fast, federal Parent PLUS loans have an origination fee and a fixed interest rate for all borrowers
  • Many private lenders don't charge origination fees for their student loans for parents, offering a cheaper alternative

    What is an origination fee?

    So, what is an origination fee exactly? Put simply, an origination fee is a one-time fee charged by lenders for handling the processing of a loan. It's essentially the cost you pay to the lender for borrowing funds, in addition to interest, and it's often applied to federal student loans, including the federal Parent PLUS loan.

    How does an origination fee affect your student loan?

    When processing your federal Parent PLUS loan, the origination fee's impact can be felt in one of two ways:

    1. The fee is added to your loan principal
    2. The fee reduces the amount disbursed

    Let's explain using a real-life example. Imagine you're taking out a federal Parent PLUS loan for $40,000. The origination fee on this type of loan is usually around 4.2% of the loan amount, amounting to $1,680 in our case.

    If the fee is added to your loan principal, the total loan amount becomes $41,680. You're slowly paying interest on an additional $1,680, yet your total disbursed sum remains $40,000.

    If the fee is subtracted from the loan amount, your loan principal stays at $40,000, but you only receive $38,320 in your first disbursement. Either way, origination fees increase the total cost of your student loan.

    Are all student loans affected by origination fees?

    Interestingly, not all student loans come with origination fees. Many private student lenders, like Citizens, don't charge any origination fees for their student loans for parents. So why do parents often end up with federal Parent PLUS loans that carry origination fees?

    Why choose a loan with an origination fee?

    Although Parent PLUS loans come with an origination fee, many parents still choose to use them, rather than private loans. There are 3 main reasons this is the case.

    First, Parent PLUS loans may actually result in a lower overall cost than private loans, despite the origination fee. Depending on your situation, Parent PLUS loans may come with a lower interest rate than other options, which might result in a lower overall financial burden.

    Next, Parent PLUS loans are eligible for certain benefits usually only applicable to federal loans. Think of things like interest-driven repayment, hardship forbearance, and loan forgiveness.

    The final possible reason is time. College bills can sneak up on you, leaving little room for research and comparison of loan options. Most colleges have a payment due date in July for the fall semester, and the rush often leads parents to choose the readily available federal Parent PLUS loan.

    The application process for the federal Parent PLUS loans is straightforward and fast, and almost everyone gets approved. So, pressured by time, many parents don’t research other options, only realizing later that they could have avoided an origination fee by going with a private lender.

    What else should you know about student loans?

    There's more to student loans than just origination fees. For instance, you may not know until later that having a good credit score could have gotten you a better interest rate with a private lender.

    Federal Parent PLUS loans have a fixed interest rate of 8.05% for all borrowers. In contrast, private lenders determine your interest rate based on your creditworthiness. With them, rates can be as low as 5%, and you get to choose between fixed and variable interest rate options. If your credit isn’t in great shape, though, private rates could also be a lot higher than Parent PLUS rates.

    How can you make the most informed decision about student loans?

    The key takeaway for parents is to start investigating student loan options as soon as your child makes their college decision. It shouldn't be a rushed decision that you take when the fall semester fee is due. Private lenders usually don't charge any origination fees, and depending on your credit score, they could offer lower interest rates.

    Here at TuitionHero, we're passionate about teaching students and parents about college finance. We offer guides and assistance on private student loans, loan refinancing, scholarships, FAFSA, and even credit card offers. So, remember, when it comes to securing student loan deals that best suit your circumstances, TuitionHero is always here to help!

    Do’s and don’ts of taking out student loans

    The student loan process, from application to repayment, can be challenging for both parents and students, with lots of factors to consider. Let's look at a quick round-up of the do’s and don'ts associated with taking out a student loan to guide you through it.

    Do

    • Do thorough research on all your loan options

    • Make note of loan details like origination fees and interest rates

    • Check out both federal and private loan options

    • Start the loan process as soon as your child decides on college

    Don't

    • Don't rush into the easiest loan available

    • Don't overlook any loan details

    • Don't restrict yourself to only one type of loan

    • Don't wait until the last minute for the college bill to sneak up

    Advantages and disadvantages of Federal Parent PLUSloans

    Understanding the pros and cons of the federal Parent PLUS loans can help you make an informed decision about whether they’re the right option for covering the cost of your child's education.

    Advantages of Federal Parent PLUS Loans

    • Almost guaranteed approval: Even people with lower credit scores can be approved for a federal
    • Parent PLUS loan.
    • Simple and quick application process: The ease of application and disbursement can make these loans less stressful for busy parents.

    Disadvantages of Federal Parent PLUS Loans

    • Origination fee: Unlike some private lenders, federal parent PLUS loans have an origination fee, increasing your loan's overall cost.
    • No credit score-based interest rates: The fixed interest rate doesn’t take creditworthiness into account, potentially leading to higher costs for borrowers with good credit.
    • The loan is in the parent's name: The burden of repayment lies fully on the parent, not the student.

    How TuitionHero can help

    At TuitionHero, we know that figuring out how to pay for your child’s college can be tough. There's a lot to learn about student loans and all the extra costs, like origination fees. We want to make it easier for parents and students.

    We can help you with different kinds of student loans, changing your loan plan, finding scholarships, filling out the FAFSA, and even picking a credit card. Our services give you all the help you need with money for college. When you use TuitionHero, you'll understand all about these fees. We're here to help you make smart financial choices and make sure your child can afford a good education.

    Frequently asked questions (FAQ)

    Yes, private lenders typically offer student loans to parents without charging any origination fees. Be sure to check out our TuitionHero guide to private student loans to help you explore these options.

    No, origination fees on a federal parent PLUS loan can’t be waived. The fee is a fixed percentage of your loan amount and is used to process and disburse the loan.

    Yes, applying for a private student loan can slightly lower your credit score due to the lender performing a credit check. However, on-time repayments will positively affect your credit score in the long run.

    No, a federal Parent PLUS loan is taken out in the parent's name, and they’re solely responsible for repayment. However, some parents make arrangements with their children to make the payments.

    Final thoughts

    Securing the best financial support for your child’s education can be a big responsibility, full of choices and extra costs, like origination fees. Don't worry though, you're not alone. At TuitionHero, we’re here to help you with everything, from student loans to scholarships, and even credit cards. We want to make paying for your child's college easier for you.

    Source


    Author

    Brian Flaherty avatar

    Brian is a graduate of the University of Virginia where he earned a B.A. in Economics. After graduation, Brian spent four years working working at a wealth management firm advising high-net-worth investors and institutions. During his time there, he passed the rigorous Series 65 exam and rose to a high-level strategy position.

    Editor

    Rachel Lauren avatar

    Rachel Lauren is the co-founder and COO of Debbie, a tech startup that offers an app to help people pay off their credit card debt for good through rewards and behavioral psychology. She was previously a venture capital investor at BDMI, as well as an equity research analyst at Credit Suisse.

    At TuitionHero, we're not just passionate about our work - we take immense pride in it. Our dedicated team of writers diligently follows strict editorial standards, ensuring that every piece of content we publish is accurate, current, and highly valuable. We don't just strive for quality; we aim for excellence.


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