Some lenders include origination fees in their student loans which could end up surprising borrowers when they receive less money than the total amount that was borrowed, or mislead them when making comparisons between different student loan options.
In order to evaluate them, we must first understand what are the origination fees in a student loan.
What are the origination fees in a student loan
Student loans have costs assessed by lenders when they issue or process a loan, this are called origination fees.
Origination fees can be found on federal student loans as well as some private student loans, and this means that a loan fee is deducted proportionately from each loan disbursement, meaning that you actually receive less than the amount that you actually are borrowing.
But a student who took out one of this loans, will also have to repay the origination fees, as students are responsible for the repaying of the entire amount accounted for in the loan.
Naturally the origination fee will also generate interest, and a new student loan will also mean that you’ll be charged a new origination fee on the new amount borrowed.
So even small origination fees could prove to be devastating by increasing your costs over time.
Difference between federal and private student loans
In private student loans the origination fees will vary by lender, some may charge them and some may not, with some calling them by a different name like application fee or disbursement fee.
Federal student loans have origination fees after Congress enacted them, but this vary depending on the type of loan that has been taken out.