07 Jan Loan Origination Fees – a brief history and commentary
By Alex Muro
Origination fees were in the headlines (at least the headlines read by FAAs, especially legislative and regulatory enthusiasts such as myself) several times in the past year, including:
- Senator Tom Harkin (D-IA) introducing the Higher Education Affordability Act in the Senate, which included a provision to eliminate Direct Loan origination fees,
- Representative Susan Davis (R-CA) introducing the Fee Free Student Loan Act in the House,
- Representative Davis also writing a blog with NASFAA President Justin Draeger for The Hill titled “End the student loan tax,”
- and members of NASFAA’s Graduate and Professional Issues Task Force meeting with lawmakers to advocate for the same.
As I began working in financial aid in 2004, I have never worked in a world without FFELP or Direct Loan origination fees. Recently, I began to wonder, have their always been origination fees? And why? So began my odyssey into the depths of the archives of the Government Printing Office and other institutions. Here is what I learned.
Origination fees were implemented in the FFEL Program as a result of the Omnibus Budget Reconciliation Act of 1981 (Public Law 97-35; August 13, 1981; included the Postsecondary Student Assistance Amendments of 1981;), which “provides for the reduction of special allowances to holders of loans made on or after October 1, 1981, by specified amounts of authorized origination fees.”1 In other words, Congress authorized FFELP lenders to charge borrowers origination fees. Interest and special allowance subsidies to those lenders would then be reduced accordingly. Effectively, this transferred some of the costs of the FFEL Program from the federal government to borrowers.
What about Direct Loans, though? Why do those have origination fees, too, when there are no lenders to subsidize? The Direct Loan Program Q & A states that “the loan fee is an expense of borrowing one of these loans.” Another federal government2 source offers only a slightly more satisfying explanation of “Direct Loan borrowers are charged an origination fee … which partially offsets Federal program operation costs.” The Balanced Budget Act of 1997 (Public Law 105-33; August 5, 1997) sheds some light on this, as it includes a section to repeal “the requirement that the Secretary pay direct loan origination fees to institutions of higher education to assist in meeting the cost of loan origination.” Presumably, that may have been the original purpose of Direct Loan origination fees. Given that at the same time the Direct Loan Program was first implemented, there were both origination and default (or insurance premium fees) in the FFEL Program, one might also infer that Direct Loan origination fees were another means to protect the federal government from the costs of defaults.
|beginning||ending||FFEL Stafford origination fee (%)||FFEL Stafford default fee (%)||FFEL Stafford total fees (%)||DL Stafford origination fee/total fees (%)|
|August 23, 1981||June 30, 1987||5.0||up to 1% per year until loan enters repayment||5.0 + default fee||n/a|
|July 1, 1987||June 30, 1994*||5.0||3.0||8.0||n/a|
|July 1, 1994||June 30, 2006||3.0||1.0||4.0||4.0|
|July 1, 2006||June 30, 2007||2.0||1.0||3.0||3.0|
|July 1, 2007||June 30, 2008||1.5||1.0||2.5||2.5|
|July 1, 2008||June 30, 2009||1.0||1.0||2.0||2.0|
|July 1, 2009||June 30, 2010||0.5||1.0||1.5||1.5|
|July 1, 2010||June 30, 2013||n/a||n/a||n/a||1.0|
|July 1, 2013||June 30, 2014||n/a||n/a||n/a||1.051|
|July 1, 2014||n/a||n/a||n/a||1.072|
PLUS loans are not included for the sake of brevity.
Prior to July 1, 2006, the default fee was referred to as an insurance premium.
* During the period from October 1, 1992, through June 30, 1994, the combined origination fee and insurance premium (default fee) on Unsubsidized Stafford Loans was 6.5%. What is included in the table above is for Subsidized Stafford Loans only for this period.
Preliminary Direct Loan volume for Fiscal Year 2014 was $77 billion in Stafford and $17 billion in PLUS loans per Trends in Student Aid 2014 from The College Board. A simple derivation yields approximately $1.5 billion in origination fees. Given this significant revenue (caveat – Direct Loan origination fees are not “collected” until the borrower repays the loan) and the austere federal budget climate, eliminating origination fees without compensating for the related loss of revenue seems unlikely. Therefore, I turned my attention to lower hanging (read – revenue neutral) fruit in the argument to eliminate these fees:
Interestingly, accounting for the origination fee in the interest rate, such as by publishing an Annual Percentage Rate (APR), is prohibited by statute. For Stafford loans the difference between the interest rate and APR is minimal, between 23 and 24 basis points, but for PLUS loans, it is 100 basis points:
|Fixed interest rate||APR|
|Graduate and Professional Stafford||6.21%||6.45%|
Origination fees also make it difficult for students and parents to determine exactly how much they need to borrow (Is that gross or net? Before or after fees?). Finally, I suspect that not all borrowers are aware that interest accrues on money they never see.
With origination fees now changing annually each October 1 as a result of the sequester, the administrative burden to schools is significant. I will leave it at that.
Stay tuned to see if any of these issues are addressed in reauthorization.