Inflation indirectly causes student loan interest rates to rise. That’s because the government tends to increase interest rates to combat rising prices, which typically raises the cost of borrowing.
Student loan interest rates have in fact risen since the Federal Reserve began raising interest rates to combat inflation during the Covid-19 economic recovery. For example, the fixed interest rate on newly disbursed federal student loans for undergraduates went from 2.75% in July 2020 to 5.50% in July 2023.
The fixed interest rate on newly disbursed federal student loans is largely determined by the high yield of the final 10-year Treasury note auction held each year in May. Bond yields are typically higher when interest rates go up.
High inflation is bad news for people seeking new student loans and those with variable interest rate loans, though people with fixed-rate loans won’t see their rates go up.
What Exactly Is Inflation?
Inflation — the rising cost of everyday items — is an important economic factor to everyone from investors to policymakers to borrowers. The reason it matters to borrowers is that inflation can lead to higher interest rates on every kind of debt, including student loans.
Put simply, inflation means that the price of bread will be higher tomorrow than it is today. So lenders may increase their interest rates during times of high inflation, given that borrowers will be paying the money back when those dollars will buy less. That’s one reason inflation and many interest rates have typically risen or fallen in step with each other.
The Federal Reserve is another reason. The country’s central bank plays a major role in managing the economy, especially with factors like interest rates and inflation.
The Fed began its rate-hiking campaign in March 2022 to combat high inflation and continued raising rates into 2023. Increases to the federal funds rate have prompted commercial banks to raise the price of consumer loans and other financial products, including private student loans.
What Does Inflation Mean for Student Loans?
To someone with student loan debt, inflation may not always be bad news. That’s because price inflation may influence wage inflation.
Inflation typically drives up the price of everything, including wages. As a result, some borrowers are paying back certain fixed-rate loans, for example, with dollars that have less value than the ones they borrowed.
There are exceptions. If a borrower took out a variable rate private student loan, it’s likely that inflation will lead to higher interest rates, which will translate into higher interest rates that the borrower has to pay. But if the borrower has a fixed-rate private student loan and their salary keeps up with the pace of inflation, then inflation can be helpful.
With the Federal Reserve in 2023 still aiming to cool down inflation or Consumer Price Index (CPI) growth, it’s worth checking to see whether your private student loan has a fixed or variable rate.
As a quick primer, fixed-rate loans have the same interest rate from when borrowers take out the loan to when they pay it off. Variable-rate loans change the interest they charge, which is influenced by Federal Reserve rate changes.
Variable-rate loans, also sometimes called “floating rate” loans, usually start out with lower interest rates than fixed-rate loans.
All federal student loans disbursed since July 2006 have fixed interest rates. Meanwhile, banks and other private lenders may offer fixed-rate and variable-rate private student loans.
When Does Refinancing Make Sense?
Student loan refinancing may be right for you if you qualify for a lower interest rate. Refinancing federal student loans with a private lender would remove your access to federal income-driven repayment (IDR) plans and Public Service Loan Forgiveness (PSLF). A student loan refinancing calculator may come in handy as you weigh your options.
The first step is to check the interest rates on your existing student loans against the rates offered by other lenders. If they offer a better rate, then it may be possible to pay off that student loan debt faster or reduce your monthly payments with refinancing.
Some lenders refinance both federal and private student loans. If you choose to refinance federal student loans with a private lender, realize that you will give up federal benefits and protections like IDR plans and PSLF.
After a three-year pause, interest accrual on federal student loans will resume on Sept. 1, 2023, and payments will be due starting in October 2023. If you qualify for a lower interest rate, student loan refinancing may reduce your borrowing costs. Refinancing for a longer term, however, may increase your total interest costs.
Borrowers with variable-rate student loans may see their borrowing costs go up during times of rising inflation. Whether your student loans have a fixed or variable interest rate, the impact of consumer price inflation across the economy may impact your ability to make ends meet.
If you find student loan refinancing is right for you, SoFi can help. SoFi refinances federal student loans, parent PLUS loans, and private student loans with no origination or prepayment fees.
See if you prequalify for a student loan refinance with SoFi.
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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
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On Saturday June 3rd, President Joe Biden signed the long-awaited debt ceiling deal into law. The Fiscal Responsibility Act of 2023 averts the general economic chaos that could ensue if the U.S. defaulted on its domestic and foreign debts, and imposes cuts in federal spending.
The legislation also ends the three-year pause on federal student loan payments and interest accrual in effect since March 2020.
When Will Federal Student Loan Payments Resume?
According to the bill’s language, the federal student loan payment pause will end “60 days after June 30th,” or Aug. 30th.
Student loan interest will resume starting on Sept. 1, 2023, and payments will be due starting in October. The Department of Education will notify borrowers well before payments restart.
On June 30th, the Supreme Court ruled against President Joe Biden’s plan to forgive up to $20,000 in federal student loan debt for qualified loan holders, saying the president did not possess the constitutional authority to take such an action but that Congress should make such a decision.
The Department of Education is instituting a 12-month “on-ramp” to repayment, running from October 1, 2023 to September 30, 2024, so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.
In addition to the “on ramp” program, Biden said he will strengthen a plan that reduces federal loan holders’ debt based on their income called SAVE.
For years, people who struggled to pay their federal student loans could enroll in the government’s Income-Driven Repayment Plans . Such a plan sets your monthly federal student loan payment at an amount that is intended to be affordable based on your income and family size. It takes into account different expenses in your budget.
The four income-based plans are: Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
Biden said that his Administration is “creating a new debt repayment plan, so no one with an undergraduate loan has to pay more than 5 percent of their discretionary income.”
The Takeaway
The Fiscal Responsibility Act of 2023, commonly referred to as the debt ceiling bill, officially cancels the pause on federal student loan repayment and interest accrual at the end of August. Borrowers must now prepare to repay their loans this fall. Federal student loan interest will resume starting on Sept. 1, 2023, and payments will be due starting in October.
Student loan refinancing is one way borrowers can seek to make student loan payments more manageable. Note that the refinanced amount will lose access to federal protections and programs, and you may pay more in interest over the life of the loan if you refinance with an extended term.
Refi with SoFi today to get flexible terms and a competitive low rate.
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SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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The expense ratio is the annual fee that mutual funds and exchange-traded funds (ETFs) charge investors, to cover operating costs. The fee is deducted from your investment, reducing your returns each year — which is one reason why expense ratios have been shrinking.
Typically, investors may look for funds that offer lower expense ratios, as high expense ratios can take a substantial bite out of long-term returns, affecting investors’ financial plans.
Here’s a look at how expense ratios are calculated, what they encompass, and other factors worth considering when choosing a mutual fund or ETF to invest in.
How Expense Ratios Are Calculated
Though individual investors typically won’t find themselves in a situation where they need to calculate an expense ratio, it’s helpful to know how it’s done. To calculate expense ratios, funds use the following equation:
Expense Ratio = Total Fund Costs/Total Fund Assets Under Management
For example, if a fund holds $500 million in assets under management, and it costs $5 million to maintain the fund each year, the expense ratio would be:
$5 million/$500 million = 0.01
Expressed as a percentage, this translates into an expense ratio of 1%, meaning you would pay $10 for every $1,000 you have invested in this fund.
As you research funds you may come across two terms: gross expense ratio and net expense ratio. Both have to do with the waivers and reimbursements funds may use to attract new investors.
• The gross expense ratio is the figure investors are charged without accounting for fee waivers or reimbursements.
• The net expense ratio takes waivers and reimbursements into account, so it should be a lower amount.
A fund’s expense ratio is expressed as a percentage of an individual’s investment in a fund. For example, if a fund has an expense ratio of 0.60%, an investor will pay $6.00 for every $1,000 they have invested in the fund.
The cost of an expense ratio is automatically deducted from an investor’s returns. In fact, when an investor looks at the daily net asset value of an ETF or a mutual fund, the expense ratio is already baked into the number that they see.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
The Components of an Expense Ratio
The fees that make up the operating costs of a mutual fund or ETF can vary. Generally speaking, the investment fees included in an expense ratio will include the following:
Management Fees
The management fee is the amount paid to the person/s managing the money in the investment fund — they make decisions about which investments to buy and sell and when to execute trades. Management fees can vary depending on how much activity is required of these managers to maintain the fund.
Custodial Fees
Custodial fees cover the cost of safekeeping services, the process by which a fund or other service holds securities on an investor’s behalf, guarding the securities from being lost or stolen.
Marketing Fees
Also known as 12b-1 fees, marketing fees are used to pay for the advertising of the fund, some shareholder services, and even employee bonuses on occasion. FINRA caps these fees at 1% of your assets in the fund.
Other Investment Fees
Investors may be forced to pay other investment fees when they buy and sell mutual funds and ETFs, including commissions on trades to a broker. The cost of buying and selling securities inside the fund is not included as part of the expense ratio. Additional costs that are not considered operating expenses include loads, a fee mutual funds charge when investors purchase shares. Contingent deferred sales charges and redemption fees, which investors pay when they sell some mutual fund shares, are also paid separately from the expense ratio.
How to Research Expense Ratios
Luckily, you do not have to spend your time calculating expense ratios on your own. The Securities and Exchange Commission (SEC) requires that funds publish their expense ratios in a public document known as a prospectus. The prospectus reports information important to mutual fund and ETF investors, including investment objectives and who the fund managers are.
Online brokers often allow you to look up expense ratios for individual investment funds, and they may even offer tools that allow you to compare ratios across funds.
Average Expense Ratios
Expense ratios vary by fund depending on what investment strategy it’s using. Passively managed funds that frequently track an index, such as the S&P 500 index, and require little intervention from managers, tend to have lower expense ratios. ETFs are usually passively managed, as are some mutual funds. Other mutual funds may be actively managed, requiring a heavier touch from managers, which can jack up the expense ratio.
Expense ratios have been falling for decades, according to the most recent Morningstar Annual U.S. Fund Fee study, released in June 2022. “In 2021, the asset-weighted average expense ratio of U.S. open-end mutual funds and ETFs was 0.40%, compared with 0.87% in 2001,” the report states.” While that difference may seem slight, investors saved an estimated $6.9 billion in fund expenses in just one year.
💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
What’s a Good Expense Ratio?
When considering expense ratios across mutual funds and ETFs, it’s helpful to use average expense ratios as a benchmark to get an idea of whether a specific expense ratio is “good.”
Investors may want to target funds with expense ratios that are below average. The lower the expense ratio, the less expensive it is to invest in the fund, meaning more profits would go to the investor vs. the fund.
That said, some investors may prefer to invest in actively managed funds, which typically charge higher fees than passive or index funds.
Looking Beyond Expense Ratios
When comparing mutual funds and ETFs, an investor might choose to consider other factors in addition to expense ratios.
It can be a good idea to consider how a particular fund will fit in their overall financial plan. For example, individuals looking to build a diversified portfolio may want to target a fund that tracks a broad index like the Nasdaq or S&P 500. Or, investors with portfolios heavily weighted in domestic stocks may be on the hunt for funds that include more international stocks.
And it’s also a good idea to know the key differences between mutual funds and ETFs. ETFs, for example, are generally designed to be more tax efficient than mutual funds, which can also have a big impact on an investor’s ultimate return. ETFs are generally lower in cost than mutual funds as well.
The Takeaway
Expense ratios seem small, but they can have a big impact on investor returns. For example, if an individual invested $1,000 in an ETF with a 6% annual return and a 0.20% expense ratio, and continued making a $1,000 investment each year for the next 30 years, they would earn $81,756.91, and spend $3,044.76 on the fund’s expenses.
But expense ratios are only one of many factors to consider when choosing a mutual fund or ETF. Fundamentally your investment choices have to fit into your larger financial plan. But cost should always be a concern.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Mortgage-backed securities are bond-like investments made up of a pool of mortgages. When you purchase a mortgage-backed security, you’re buying a small portion of a collection of loans that a government-sponsored entity or a financial institution has packaged together for sale.
Investors may refer to these loans as MBS, which stands for mortgage-backed securities. Investing in mortgage-backed securities allows investors to get exposure to the real estate market without taking direct ownership of properties or making direct loans to borrowers. Mortgage-backed securities offer benefits to other stakeholders as well, namely loan-issuing banks, private lenders, and investment banks who issue them.
Mortgage-backed securities have a stained reputation due to their role in the housing market collapse in 2008. However, that crisis led to increased regulation, and depending on your investment goals, there may be a case for including mortgage-backed securities in a diversified portfolio.
What Is a Mortgage-Backed Security?
Mortgage-backed securities are asset-backed investments, in which the underlying assets are mortgages.
Government entities and some financial institutions issue mortgage-backed securities by purchasing mortgages from banks, mortgage companies, and other loan originators and combining them into pools, which they sell to investors.
The financial institution then securitizes the pool, by selling shares to investors who then receive a monthly distribution of income and principal payments, similar to bond coupon payments, as the mortgage borrowers pay off their loans.
💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.
How a Mortgage-Backed Security Works
When dealing with mortgage-backed securities, banks essentially become middlemen between the homebuyer and the investment industry.
2. The bank or mortgage company sells that new loan to an investment bank or government-sponsored entity, and uses the sale money to create new loans.
3. The investment bank or government-sponsored entity combines the newly purchased loan into a bundle of mortgages with similar interest rates.
4. This investment bank assigns the loan bundle to a Special Purpose Vehicle (SPV) or Special Investment Vehicle (SIV) which securitizes the bundles of loans. This creates a separation between the mortgage-backed securities and the investment bank’s primary services.
5. Credit rating agencies review the security and rate its riskiness for investors. The SPV or SIV then issues the mortgage-backed securities on the trading markets.
When the process operates as intended, the bank that creates the loan maintains reasonable credit standards and makes a profit by selling the loan. They also have more liquidity to make additional loans to others. The homeowner pays their mortgage on time and the mortgage-backed securities holders receive their portion of the principal and interest payments.
While some private financial institutions issue mortgage-backed securities, the majority come from government-sponsored entities. Those include Ginnie Mae, the Government National Mortgage Association; Fannie Mae, the Federal National Mortgage Association; and Freddie Mac, the Federal Home Loan Mortgage Corporation.
The U.S. government backs and secures Ginnie Mae’s mortgage-backed securities, guaranteeing that investors will receive timely payments. Fannie Mae and Freddie Mac do not have the same guaranteed backing, but they can borrow directly from the Treasury when needed.
What Are the Risks of Investing in Mortgage-Backed Securities?
Like all alternative investments, mortgage-backed securities carry some risks that investors must understand. One such risk is prepayment risk, in which mortgage borrowers pay off their mortgages (often because they move or refinances), reducing the yield for the holder of the MBS. Mortgage defaults could further decrease the value of mortgage-backed securities.
Other risks include housing market fluctuations and liquidity risk.
There are several different types of mortgage-backed securities.
Pass-Through
A Pass-Through Participation Certificate or Pass-Through is the simplest type of MBS. They are structured as trusts, in which a servicer collects mortgage payments for the underlying loans and distributes them to investors.
Pass-through mortgage-backed securities typically have stated maturities of five, 15, or 30 years, though the term of a pass-through may be lower. With pass-throughs, holders receive a pro-rata share of both principal and interest payments earned on the mortgage pool.
Residential Mortgage-Backed Securities (RMBS)
Residential mortgage-backed securities are mortgage-backed securities based on loans for residential homes.
Commercial Mortgage-Backed Securities (CMBS)
Commercial mortgage-backed securities are mortgage-backed securities based on loans for commercial properties, such as apartment buildings, offices, or retail spaces or industrial properties.
Collateralized Debt Obligations (CDOs)
These securities are similar to mortgage-backed securities in that CDOs are also asset-backed and may contain mortgages, but they may also include other types of debt, such as business, student, and personal loans.
Collateralized Mortgage Obligations (CMO)
CMOs or Real Estate Mortgage Investment Conduits (REMICs) is a more complex form of mortgage-backed securities. A CMO is a pool of mortgages with similar risk categories known as tranches. Tranches are unique and can have different principal balances, coupon rates, prepayment risks, and maturity rates.
Less-risky tranches tend to have more reliable cash flows and a lower probability of being exposed to default risk and thus are considered a safer investment. Conversely, higher-risk tranches have more uncertain cash flows and a higher risk of default. However, higher-risk tranches are compensated with higher interest rates, which can be attractive to some investors with higher risk tolerance.
Mortgage-Backed Securities and the 2008 Financial Crisis
Mortgage-backed securities played a large role in the financial crisis and housing market collapse that began in 2008. By 2008, trillions of dollars in wealth evaporated, prominent companies like Lehman Brothers and Bear Stearns went bankrupt, and the global financial markets crashed.
At the time, banks had gotten increasingly lenient in their credit standards making risky loans to borrowers. One reason that they became more lenient was because they were able to sell the loans to be packaged into mortgage-backed securities, meaning that the banks faced fewer financial consequences if borrowers defaulted.
When home values fell and millions of homes went into foreclosure, the value of all those mortgage-backed securities and CDOs plummeted, indicating that they had been riskier assets than their ratings indicated. Many investors lost money; many homeowners foreclosed on their homes.
An important lesson from that time is that mortgage-backed securities have risks associated with the underlying mortgage borrower’s ability to pay their mortgage.
💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
MBS Today
Residential mortgage-backed securities now face far more government scrutiny than they did prior to the financial crisis. MBS mortgages must now come from a regulated and authorized financial institution and receive an investment-grade rating from an accredited rating agency. Issuers must also provide investors with disclosures including sharing information about their risks.
Investors who want exposure to mortgage-backed securities but don’t want to do the research or purchases themselves might consider buying an exchange-traded fund (ETF) that focuses on mortgage-backed securities.
The Takeaway
Mortgage-backed securities are complex investment products, but they have benefits for investors looking for exposure to the real estate debt without making direct loans. While they do have risks, they may have a place as part of a diversified portfolio for some investors.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Many students rely on student loans to help them pay for college. In addition to charging interest, student loans may also have additional fees associated with them. Fees charged may include origination fees — a fee charged by the lender for processing the loan — or late payment fees.
When students sign up for loans or are in the midst of repayment, they may not even be aware of fees that accompany many private and federal student loans. But by learning about these fees, they can better prepare themselves financially and avoid headaches.
What Are Student Loan Fees?
As briefly mentioned, student loan fees are charged to borrowers and are not the same as the interest rate. Interest rates on student loans are fixed or variable, and will increase the cost of the loan over time.
Student loan fees may include:
• Origination fees
• Late payment fees
• Returned-check fees (aka insufficient-funds or non-sufficient-funds fees)
• Loan collection fees
• Forbearance and deferment fees
Can a Student Loan Fee Be Waived?
For the most part, student loan fees cannot be waived. In some instances, lenders may be willing to waive late payment fees for borrowers who have not previously made a late payment. Fees and policies may vary by loan type and lender, so contact your lender with specific questions. Continue reading for an explanation of different types of fees that may be associated with a student loan.
Origination Fees
Origination fees cover the cost of processing the loan. They are typically a small percentage of the loan amount.
What Is an Origination Fee on a Student Loan?
An origination fee on a student loan functions similarly to origination fees on other types of loans. Origination fees are generally charged as a percentage of the loan.
How Are Student Loan Origination Fees Assessed?
Student loan origination fees are charged as a percentage of the loan amount. Federal student loans do have an origination fee, and the information will be included in the master promissory note. For federal student loans, the origination fee is deducted from the amount borrowed, so when you receive the loan it will actually be for less than the amount you borrowed.
Private student loans may or may not charge an origination fee, the policy will depend on the lender.
How Much Are Student Loan Origination Fee?
For federal student loans, the origination fee (also known as disbursement fee) is dependent on the loan type. Direct Subsidized and Unsubsidized loans disbursed between October 1, 2020 and October 1, 2024 have a 1.057% origination fee. During the same timeframe, Direct PLUS Loans have a 4.228% origination fee. Direct Unsubsidized and Subsidized Loans are types of student loans for undergraduate programs. Unsubsidized loans and Direct PLUS Loans are student loans for graduate programs.
The origination fee on private student loans will vary based on the lender, and not all private lenders charge an origination fee. Review the terms and conditions closely and contact your lender with any questions.
Late Payment Fees
Making a loan payment past the due date for a federal student loan can result in a late fee. After 30 days, the late fee may be up to 6% of the loan amount due. Review your Master Promissory Note or contact your loan servicer with questions.
The late fee for a private student loan depends on the lender and loan program. Some private student loan lenders do not charge late fees.
Returned-Check Fees
If a borrower pays using a check that bounces, the student loan servicer could charge a returned-check fee.
Loan Collection Fees
If a borrower defaults on a loan by not making payments for a certain amount of time (270 days for most federal student loans), the loan may be placed with a collection agency and be subject to loan collection fees. Any fees incurred will be in addition to the outstanding principal balance, interest, and fees.
Private student loan companies may charge even higher loan collection fees. Generally private student loans also enter default sooner than federal student loans. The default period is described in the loan contract.
Forbearance and Deferment Fees
Borrowers who cannot make payments temporarily can request student loan forbearance or deferment. Typically, loan holders can avoid a fee, but they will need to contact their loan provider.
Forbearance and deferment are available for most federal student loans. Private lenders are not obligated to offer either program, but may offer some forms of deferment. If you are struggling to make payments on a private student loan, contact your lender to evaluate the options available to you.
Federal Student Loan Fees
When students want to apply for a loan, they can do it through the federal government or a private company, depending on their circumstances. The loan providers charge different types of fees.
Students will pay an origination fee for a federal student loan. As mentioned previously, for Direct Subsidized and Unsubsidized Loans, the fee is about 1.057% of the loan amount. For Direct PLUS Loans (including Grad PLUS and Parent PLUS Loans), the fee is about 4.228% of the loan amount.
A late payment fee will typically be charged within 30 days after the payment is due. The late fee could be up to 6%. At that rate, if your monthly minimum payment is $250, your fee would be $15.
Private Student Loan Fees
Loans for students from private lenders may not charge origination fees, though there may be an origination fee for a specialty loan, like a loan for medical school.
Some lenders charge late fees — generally a percentage of the late payment amount or a flat fee. They also typically charge for returned checks.
Additionally, most private student loan companies charge a fee for forbearance, a flat fee determined by the lender.
Collection fees will vary from lender to lender. If there is a collection fee on a private student loan, it will typically be included in your loan agreement.
A lender like SoFi® has staked its reputation on no fees: no late fees, insufficient-funds fees, or origination fees for private student loans.
Avoiding Student Loan Fees
If students need to take out private or federal student loans, they can at least avoid some of the fees.
Federal student loan origination fees are pretty unavoidable. With other loans, even if a student can persuade a company to take off the origination fee, that could mean a higher interest rate, which is usually not worth it.
Paying on time is always recommended, not only to avoid late fees but to keep a credit report healthy. To avoid late fees, returned-check fees, and collection fees, borrowers can set up automated payments from a bank account. Otherwise, they can set up reminders on their phones and calendars that go off when their payments are about to come due.
In terms of deferment fees, borrowers having trouble making payments on time can call their student loan servicer and ask for extensions or other options so that they don’t go into default.
Going into default can cause a credit score to drop significantly and hurt the chances of getting a mortgage, other loan, or credit card in the future. (Student loan deferment or forbearance do not hurt an overall credit score.)
Students shouldn’t be afraid to reach out to their loan servicer as soon as they can’t make a payment.
Plenty of borrowers end up in a tough spot financially and need a little help. Even if borrowers have to pay more interest over time by extending the loan term, that is almost always better than defaulting.
Some student loan companies don’t charge fees. Signing up for a loan with one of these companies could put money back into your pocket that could go toward repaying the loan.
Fee-Free Student Loans
Undergraduate and graduate school loans. Law school and MBA loans. Parent loans. SoFi offers all of those private student loans with no fees — no origination fees, returned-check fees, or late fees.
A loan comes with a fixed or variable rate and a flexible term. And there is no prepayment penalty.
As a bonus, SoFi members can access perks like financial advice, career coaching, and Edmit Plus, a tool that helps estimate financial aid, compare cost of attendance, and highlight merit aid and scholarships available.
Paying for College
Paying for college may require a combination of resources. One of the first places for students to start their financial aid journey is by filling out the Free Application for Federal Student Aid (FAFSA®) every year. This application allows students to find out if they are eligible for federal financial aid, including federal private loans, grants, scholarships, and work-study.
When comparing your options, it’s important to understand the difference between grants vs. scholarships vs. student loans from a private lender. Continue reading for information on these three categories of aid and additional strategies for paying for college in addition to federal student loans.
Private Student Loans
Private student loans, as mentioned, are offered by private lenders such as banks, credit unions, and other financial institutions. To apply, potential borrowers will need to file applications with individual lenders.The interest rate and loan terms are generally determined based on the applicant’s personal information such as their income and credit score, among other factors. It’s generally worth shopping around to find the best rate and loan terms for your personal situation.
Private student loans can be helpful tools to pay for college. However, when comparing private student loans vs. federal student loans, it’s important to note that private student loans lack the borrower protections afforded to federal student loans – things like income-driven repayment plans or deferment options. For this reason they are generally considered an option after all other financial resources have been depleted.
Credit Card
It can be possible to pay for college tuition using a credit card. While schools may accept payment by credit card, there is generally a fee associated. This fee can be between 2.5% to 3% depending on the school, which likely offsets the rewards you may be earning on your credit card.
Credit cards could be helpful for students while they are paying for other college related expenses, like textbooks, food, or other living expenses. Credit cards, when used responsibly, can be tools to help individuals build or establish their credit history. If you plan on using a credit card to pay for expenses, aim to pay off the card each month to avoid accruing interest. Credit card interest rates can be very high — the average interest rate for new credit cards was 22.45% as of July 2023, according to WalletHub.
Personal Savings
Some students may have the money saved to go to college, or someone in their family might be able to finance their education. For instance, perhaps their parents or grandparents opened a 529 savings plan for them when they were younger and funded it with money to put toward college.
Grants
Grants are a type of funding for school that typically don’t need to be repaid. Grants are generally awarded based on financial need and can be found from sources such as the federal or local government, college, or even nonprofit organizations.
Each grant application may have different application and eligibility requirements so be sure to read the instructions closely.
Scholarships
Scholarships are another type of aid that recipients are not required to repay. Often, they are awarded based on merit though can be awarded based on other criteria as well.
Students can look for scholarships in a variety of places, schools, nonprofit and community organizations, companies, and more all offer scholarships.
Take a look at your school’s financial aid website to see what scholarships are available at your school. There are also online databases like Scholarships.com that aggregate information on available scholarships, including basic eligibility criteria. Some scholarships can be quite competitive, so it may be worth applying to a variety of scholarships.
The Takeaway
Student loan fees like an origination fee or late payment fees can increase the total cost of borrowing the loan. The types of fees on student loans will vary based on the loan type. For example, federal student loans do charge an origination fee which varies based on the type of federal loan and there are late payment fees associated with payments that are 30 or more days late.
Private loans may or may not have an origination fee or late payment penalties. The policies will vary by lender. If you’re interested in a private student loan, be sure to shop around and compare fees in addition to interest rate and loan terms to fully understand the cost of the loan.
Private student loans with SoFi have no fees, including no origination fees or late payment penalties. Qualifying borrowers can secure a competitive interest rate and SoFi members are eligible for other benefits like career coaching and member events.
Check your rate on a SoFi private student loan in a few clicks.
FAQ
How much is the origination fee for student loans?
The origination fee on a student loan will likely vary depending on the loan type and lender. For federal student loans, the origination fee from October 1, 2020 through October 1, 2024 is 1.057% for Direct Subsidized and Unsubsidized Loans and 4.228% for Direct PLUS Loans.
The origination fee on a private student loan will vary by lender.
Do unsubsidized student loans have an origination fee?
Yes, unsubsidized loans through the federal government’s Direct Loan Program do have an origination fee of 1.057% for loans disbursed between October 1, 2020 and October 1, 2024.
Can a student loan origination fee be waived?
Federal student loans have an origination fee and it’s unlikely to have this fee waived. Some private student loans may not charge an origination fee and lenders that do may be willing to negotiate with borrowers.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
