What Is an Origination Fee?

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 View all definitionscollege 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, like 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 effect 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, theLearn more 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.

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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!

Dos 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.

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 applying for 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 applying for 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.

Why trust TuitionHero

At TuitionHero, we simplify paying for your child’s college. We assist with student loans, loan plans, scholarships, FAFSA, and credit cards. Our services provide all the financial guidance you need for college. With TuitionHero, you’ll make informed financial choices for your child’s education.

Frequently asked questions (FAQ)

Are there any alternatives to the federal Parent PLUS loan with no origination fee?

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.

Can the origination fee be waived for a federal Parent PLUS loan?

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.

Will private student loans affect my credit score?

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.

Is my child responsible for paying back a federal Parent PLUS loan?

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

• Parent PLUS Loans | Federal Student Aid
• Origination fee - Wikipedia
• Parent Student Loan - Citizens