Student Loan 'Tax' Cut: Bill Would Eliminate Origination Fees on New Federal Loans

A new bill called the "Student Loan Tax Elimination Act" is looking to get rid of those pesky origination fees currently tacked onto new federal direct student loans and federal direct consolidation loans. If this becomes law, it means that for any of these loans where the first chunk of money is paid out (or for consolidation loans, when your application is received) on or after July 1st of the year after the bill is enacted, you wouldn't be charged this upfront fee. The main idea? To shave a bit off the total cost of borrowing for higher education.

Understanding Origination Fees: The Cost of Borrowing Money

So, what exactly is an origination fee? Think of it as a processing fee the government charges when you take out a Federal Direct Loan under Part D of Title IV of the Higher Education Act of 1965. It's a percentage of your total loan amount, and it's usually deducted before the loan money even hits your student account. For example, if you borrow $10,000 and there's a 1% origination fee ($100), you might only see $9,900 disbursed for your use, but you're still on the hook for repaying the full $10,000 plus interest. This bill aims to stop that by repealing subsection (c) of section 455 of the Higher Education Act of 1965 (that's 20 U.S.C. 1087e(c) in legal speak), which is the rule that allows these fees on Direct Loans in the first place.

Who Catches a Break and When?

If this bill passes, the good news is for future borrowers. Anyone taking out a new Federal Direct Loan – that includes Subsidized Loans, Unsubsidized Loans, and PLUS Loans for graduate students or parents – would benefit. The same goes if you're looking to combine existing federal loans into a new Federal Direct Consolidation Loan. The key timing, as mentioned, is for loans where the first principal disbursement is made, or for consolidation loan applications received, "on or after July 1 following the enactment of this Act." So, if your loan is already out there, or your consolidation is wrapped up before this potential change takes effect, this particular bill wouldn't apply retroactively to those past fees. But for future borrowing, it could mean a little more of your loan money goes directly to your education costs, rather than being skimmed off as a fee.