Paying Student Loan

By: EconomyWatch Content   Date: 7 December 2009

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Obtaining a student loan is often a daunting task, and paying it off one is even more difficult. A student loan repayment is a long-term debt obligation, wherein a borrower is required to commit to at least 10% of his/her monthly income towards paying the student loan.   

Paying Student Loan Fees

Student loan payments do not just involve paying the loan principal and interest amount. A student can consider introducing a co-signer on a student loan but this involves tremendous responsibility on the latter.

Most education loans accompany some loan fees. Typically, this is an origination fee for processing the loan paperwork. This fee is a one-time charge, which is based on the loan amount. Origination fees can be paid separately or added to the total loan amount, depending on the borrowers’ preferences.

 

Private Education Loans

An origination fee is usually one percent of the loan amount, though some private student loan lenders may charge as much as 3% to 4%. A student with a sound credit history may succeed in negotiating for a lower percentage.    

Federal Education Loans

A federal student’s loan terms, including stipulations for origination fees, are administered jointly by the US Federal Government and the Department of Education.

The fee-payments determined for different federal student loans are:

·        Stafford Loans: These accompany a loan fee of 4% of the net loan amount. The loan fee under Stafford Loan comprises an origination fee of 3% and a default fee (guarantee fee) of 1%. Previously, the default fee was waived by many student loan guarantee agencies; however effective from July 1, 2006, the default fee has been made mandatory. The payment of loan fees on a Stafford loan is deducted automatically from a borrower’s disbursement check.

·        PLUS Loans: A standard loan fee of 4% from all PLUS loan holders. Some lenders may offer discounts or reimbursements of loan fee, for making timely payments or setting up automatic monthly payments through a checking/savings account. Typically, payment towards a loan fee on a PLUS Loan is deducted from the borrowers’ disbursement check.

The federal Perkins Loan does not carry any bear origination and default fees as it is intended for students having exceptional financial need.

A large percentage of loan fees increases the borrowers’ total burden of debt. So, it is crucial to not only compare the interest rates but also compare the APR (Annual Percentage Rate). Unlike the ‘base rate,’ this rate includes the fees charged on the loan, thereby, providing a more realistic picture of the student loan payment obligation.


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