When it comes to just about anything financial, the amount you see advertised is usually not the amount you’ll pay or repay. There are all sorts of fine print you may or may not look at that can tack on additional fees and charges. In the loan world, one such charge takes the form of the origination fee.
We’ve put together a quick primer on what an origination fee is, where you’ll encounter it with regard to the student loans you’ll borrow, and how you should look for the right student loan while still keeping the origination fee in mind. By the end, you should be a more savvy student loan customer, ready to get the best deal with the lowest borrowing amount that will put you in the least amount of debt.
What is an Origination Fee?
The name of the fee is quite fitting when you consider what the word origin means — the beginning or the start. But there’s a bit more to it than that. The origination fee acts as a sort of processing fee your lending bank can charge when it processes your student loan and the agreement tied to it. You won’t pay this fee when you apply for your loan. Instead, the fee is charged when you’re approved for your loan, you’re okay with the amount you’re borrowing, and you put your signature on the loan agreement.
How Much is the Fee?
The origination fee is typically a percentage of the total amount you’re borrowing. And the percentage you’re given when you’re approved for your loan usually depends on your credit history. If you have pretty good credit, the fee percentage will be lower. If you have less than stellar credit, the fee percentage will be higher. Another important note: the way you’re charged the origination fee can differ depending on the lender. In some cases, the fee is added on to the total amount you’ve borrowed. In others, the fee is deducted from your approved loan amount.
Are Origination Fees Normal?
Yes. It’s not unusual to discover there is an origination fee loans. In fact, student loans are not the only loans that have origination fees. If you pay a mortgage, or if you have an auto loan, it’s very likely that you also paid an origination fee when you signed the agreements for those loans.
Does Everyone Charge an Origination Fee?
Federal Student Loans
Most student loan borrowers take out federal loans to start, and these loans do charge this fee. Here are the current origination fees for federal student loans.
|Loan Type||First Disbursement Date||Origination Fee|
|Direct Subsidized Loans and Direct Unsubsidized Loans||On or after 10/1/16 and before 10/1/17||1.069%|
|Direct Subsidized Loans and Direct Unsubsidized Loans||On or after 10/1/17 and before 10/1/18||1.066%|
|Direct PLUS Loans||On or after 10/1/16 and before 10/1/17||4.276%|
|Direct PLUS Loans||On or after 10/1/17 and before 10/1/18||4.264%|
Private Student Loans
Private student loans often do not have origination fees. Since private loans are more guided by market conditions, unlike federal student loans, banks are competing for your business. One incentive they give the consumer to borrow from them is to remove all origination fees.
Here are three private lenders who do not have an origination fee:
Origination Fees Shouldn’t Be a Deal Breaker
It’s important to know that the absence of an origination fee does not necessarily mean you’re getting a great deal on your loan. The process of beginning a loan with a borrower costs the lending bank whether they charge this fee or not, and they’ll likely want to make this cost up somewhere. It’s possible you could take out a student loan with no origination fee but with a higher interest rate. Over time, you could pay more for this loan than you would have if you’d chosen a loan with an origination fee and a higher interest rate.
How Should I Choose the Best Loan?
Now that you know what an origination fee is, you can take a look at the other factors of your loan and determine, over the loan repayment period, how much you’ll actually pay when all is said and done.
Prior to borrowing, you’ll want to get pre-approved for your loans from the lenders you’re interested in borrowing from. Your credit will be checked, but most lenders use what is called a “soft pull” on your credit report, which does not penalize your credit score. When a lender knows what kind of credit you bring to the table, you’ll get a better idea of the terms they’re willing to offer.
Consider the Origination Fee
Next, look for an origination fee. If a fee is present, the percentage will be based on your credit. Take note of the different loans you could borrow, whether or not they charge this fee, and the percentage you’ll be charged.
Compare Interest Rates
Finally, look at the loan interest rate. Depending on whether your loan is a federal loan or a private loan, the interest rate could either be fixed for all borrowers or dependent on your credit. Take note of your interest rate and calculate how much interest you stand to pay over the life of your loan.
Consider the Repayment Plans
For federal student loans there are many options for repayment of the loan. You could make standard payments based on the interest rate, loan amount, and term of loan. Conversely, you could make payments based on your income which help prevent you from ever falling into default since they payments should always be affordable. Make sure you understand your repayment options when borrowing student loans.
Now decide on the best deal, taking both the origination fee and interest rate into consideration. Again, the absence of an origination fee does not automatically make one loan better than another. You should take your total cost over time into account.
We hope this primer helped you better understand the origination fee and how it fits into the student loan process. The origination fee is just one item in understanding how loans work. Good luck!
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.