5 Student Loan Fees That Make Your Debt More Expensive

5 Student Loan Fees That Make Your Debt More Expensive
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Borrowing tens of thousands of dollars in student loans is, unfortunately, quite common for students pursuing a college degree. The average 2020 college graduate borrowed $28,400 in student loans, according to College Board. But that figure isn’t all that borrowers owe—they also have to pay interest and other charges.

While many borrowers focus on loans with the lowest interest rates, other types of fees can also affect the cost of your loan. Both federal and private student loan lenders charge various fees, but some may be avoidable. Here are common student loan fees to watch out for.

1. Origination Fees

Some lenders charge origination fees for processing your loan. It’s usually a percentage of your total loan and is subtracted from the amount you borrow. Say, for instance, you’re approved for $10,000 in federal unsubsidized loans, with a 1.057% origination fee. That translates to a $105.70 charge, which is deducted from your total loan amount—so you would actually receive $9,894.30 for the year.

All federal student loans and some private student loans charge an origination fee. Private loan origination fees vary widely by lender, but it’s possible to find a private loan that doesn’t come with these fees. For federal student loans, the origination fees in 2022 are:

  • Direct subsidized and unsubsidized loans: 1.057%
  • PLUS loans: 4.228%

2. Late Payment Fees

If you don’t make the minimum payment by the due date, you could face a late payment fee. Most private and federal student loans charge late fees. With federal student loans, your loan servicer—not the government—levies the fee.

Some lenders charge a flat rate for this, like $25 each time. Others charge a percentage of the amount due; if you owe $300 and there’s a 5% late fee tacked on, that’s an extra $15 added to your bill. Read your loan’s promissory note to see how much a late payment could cost you.

Each lender has different interpretations of “late”—some will give you 15 or even 30 days as a grace period to make the payment. Others consider the next day past due, and therefore late. Some lenders, such as SoFi, don’t charge late fees.

You can avoid late fees by setting up autopay, which will automatically pay your student loan bill each month at a set time.

3. Returned Payment Fees

If you submit a student loan payment but don’t have enough money in your bank account to cover it, you could face a returned payment fee, also called an insufficient funds fee.

Both private and federal student loans may charge this fee. It can be levied as a percentage of the amount due or flat-rate amount, varying by the lender. It’s common for these charges to range from $15 to $30.

4. Collection Fees

If you default on your student loans and your debt enters collections, fees are added to the principal amount owed. Both private and federal student loans charge collection fees, which can add 20% or more to your monthly payments.

Defaulting on your student loans has catastrophic repercussions. Not only will fees mount, but the total outstanding balance can also become due immediately. Your credit score will tank and your wages, tax refund or Social Security benefits can be garnished.

5. Forbearance or Deferment Fees

Both deferment and forbearance temporarily pause your student loan payments for a set amount of time in certain circumstances. While this can help keep your loans in good standing, lenders may charge you a fee for the privilege. Exact terms vary by institution, so review your options with your lender.

In addition to a fee, most types of student loans will continue to accrue interest when you request a payment pause.

Rare or Discontinued Student Loan Fees

Though some types of student loan fees are common, there are some charges you should take a second look at when reviewing different lenders.

Application Fee

Most private student loan lenders don’t charge a fee for submitting an application. If you find one that does, do the math to see if the fees and interest rate would be less compared to another lender that doesn’t charge this fee. If the lender that charges an application fee is less overall, you may want to consider paying the upfront fee. Otherwise, keep your options open and find a lender with fewer fees.

Prepayment Penalty

A prepayment penalty charges a fee if you pay off your loans before the end of your repayment term, but student loan lenders don’t punish you for paying them off early.

While this type of fee is more common in other types of loans, it’s not allowed in student lending. If a lender tries to make you pay a fee for paying off your education loan early, you might be working with a scammer.

How to Evaluate and Compare Student Loan Fees

If you’re browsing different student loan lenders, take some time to see which ones offer the best rates.

First, it’s important to understand the difference between a loan’s interest rate and annual percentage rate (APR). The interest rate is simply the amount the lender charges to lend you money. The APR, however, calculates the total annual cost of the loan, including the interest rate and fees. For this reason, it’s better to review the APR when comparing loans from different lenders.

You might see a lender has a higher APR compared to another lender’s simple interest rate. Don’t confuse the two, and make sure you’re comparing the same type of rate between different lenders.

For federal student loan borrowers, you might not pay attention to who your loan servicer is until after you graduate (although you’ll know who it is when your loan is first disbursed). But checking which company will manage your debt can help you plan for the charges and fees that could arise.

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