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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serve no programmatic end and should be repealed by Congress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.
Background
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.
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