State PIRGs' Higher Education Project
218 D Street SE
Washington, DC 20003
(202) 546-9707

Ivan Frishberg

Ellynne Bannon


Student Loan Origination and Insurance Fees: A Tax on Student Loans

As families struggle to pay for college, they are left with little choice but to take on large amounts of debt to finance a higher education. Adding to this increasing debt burden are "student loan taxes"- of up to 4% on the principal of a student's loan. These taxes serve no programmatic end and should be repealed by Congress to make college more affordable and to help to ease the burden of student debt.


College education is integral to the future success of Americans. A college degree is worth seventy-five percent more than a high school diploma or $600,000 over a lifetime in the workforce. However, as college costs continue to swell students are increasingly shouldering larger burdens of debt. In the past seven years student loans have more than doubled to $35 billion a year.

Student loans have become the principle means of financing a college education. They serve to bridge the financial gap between a family's available resources and the cost of education. The average student graduates with a debt of $13,300, a number that is expected to rise with the release of more recent information from the Department of Education. The typical student also spends more than a decade in repayment. Students who graduate with high debt are more likely to default on their loans, forgo public service and delay major purchases.

Adding to the overwhelming burden of debt the federal government needlessly raises the cost of student loans by charging up to four percent of the loan principal in origination and insurance fees. For students the fees come at the worst possible time; when the money is needed to pay for books, tuition and living expenses. Origination and insurance fees are monies that are never seen by the student, but accrue interest and add to the burden of debt repayment.

This past April Representative Miller (D-CA) introduced the Affordable Student Loan Act, H.R. 1622. The act would eliminate insurance and origination fees on federal student loans.

It's time to end the tax on student borrowing.

Origination fees were enacted in 1981 to as a temporary measure to reduce the deficit. Their sole purpose is to raise revenue- they do not pay for administrative or program costs. The government currently charges up to three percent on guaranteed student loans and four percent on direct student loans. Insurance fees of up to one percent may be charged to guaranteed loan borrowers towards a reserve fund that pays the cost of defaulted loans. Yet, most guaranty agencies waive this fee as the reserve funds are bigger than necessary to pay for defaulted loans. Nor are origination fees necessary to offset program costs: After administrative and default costs the federal government will profit five dollars for every $100 in loans made in the Direct Loan program this year.

Taxing the student while they are in school.

Students pay more for their loans than they need to. The federal government charges a fee of up to four percent of the loan principal on student loans. A student who borrows $1,000 may only receive $960. Yet the borrower is expected to repay the full $1,000, plus interest. This is money that is taken from the student's federally assessed need while they are in school and struggling to pay for tuition, books and the cost of living.

Ending the tax on student loans will save students money and create incentives for better service.

With student loan burden rapidly increasing, the act would help to preserve access to higher education for students and save the typical borrower $532. This saved money would give students more money up front, and would be available immediately to pay for college expenses such as tuition, books and living expenses.

The act would also ensure healthy competition among lenders- since lenders would be able to offer students similar benefits - and competition would be over service and not price. This would mean more choices for student borrowers, and thus better service from lenders.

How would the Affordable Student Loan Act affect lenders?

The act would provide stability to the loan program. It would continue the Department of Education's and Congress's steps toward ensuring that all student borrowers receive similar benefits no matter which federal student loan program their school participates in.

The Affordable Student Loan Act would also solve one of the key grievances of the lender lawsuit brought against the Department of Education. In the suit a group of lenders charge that the Department unfairly reduced origination fees for borrowers in the Direct Loan Program. The Act would make this point moot - as origination and insurance fees in both loan programs would be eliminated.

Support the Affordable Student Loan Act (HR 1622). It makes college more affordable by ending the tax on student loans.