Let’s Eliminate This ‘Hidden’ Student Loan Tax

U.S. Senator Kyrsten Sinema (D-AZ) Photo credit: Getty Images

(Photo by Chip Somodevilla/Getty Images)

When there’s bipartisanship in Washington, it’s a beautiful thing.

These U.S. Senators are uniting to eliminate a ‘hidden’ student loan tax that may be costing your thousands of dollars.

Here’s what you need to know.

‘Hidden’ Student Loan Tax

U.S. Senators Rick Scott (R-FL), Mike Braun (R-IN), Kyrsten Sinema (D-AZ) and Chris Coons (D-DE) introduced the Student Loan Tax Elimination Act of 2019, which proposes to eliminate the origination fee on federal student loans beginning on July 1, 2019. The goal is to save borrowers more money on their student loans and reduce the total amount of student loan debt.

“Our students deserve every opportunity to graduate college and pursue successful careers without mountains of debt,” Scott said. “Throughout my time as Governor [of Florida], I focused on keeping college costs low so every Floridian could get an affordable education. In Florida, we’ve held the line on tuition for six years straight and increased the transparency of education expenses. Now, I’m proud to build on these efforts by supporting the Student Loan Tax Elimination Act so more students can afford a great education and pursue their dreams.”

Senator Braun has called origination fees a ‘hidden’ student loan tax.

“Student loan origination fees are nothing more than a hidden tax that burdens students,” Braun said. “This legislation is a step forward and offers one solution to addressing our broken higher education system that fails to put students first.”

How Origination Fees Work

When you borrow a federal student loan, the federal government charges you an origination fee. The origination fee is equal to a percentage of the total student loan amount borrowed, and is in addition to the amount that you borrow. This fee is deducted from your student loan disbursement, meaning that the amount of money you receive will be equal to the amount you borrowed, less the proportionate amount of the origination fee. However, when you repay your student loans, you must repay the total amount you borrowed, including the origination fee (not the amount you received).

This is why senators have called the origination fee a ‘hidden’ student loan tax (even though the U.S. Department of Education clearly discloses the origination fee).

For the 2018-2019 school year, the origination fee for federal student loans were as follows:

Direct Subsidized Loans: 1.062%  

Direct Unsubsidized Loans: 1.062% 

Direct PLUS Loans: 4.248%

The more money you borrow, the more money you pay in origination fees.

Student Loan Debt Statistics

According to the National Association of Student Financial Administrators:

  • The federal government earned $1.7 billion in revenue for the 2017-2018 school year and $8.3 billion over the past five award years.
  • The average undergraduate borrower in a four-year program will pay an estimated $294 in origination fees and associated interest if enrolled in a standard 10-year student loan repayment plan.
  • The average graduate student in a two-year program pays about $1,174 in origination fees and associated interest if repaying over 10 years.

The latest student loan debt statistics show how serious the student loan debt issue has become for borrowers across all demographics and age groups. There are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. Student loan debt is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans. It’s estimated that 40% of student loan borrowers may default on their student loans by 2023.

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