How to Calculate Student Loan Fees
Students and parents who borrow from the Federal Direct Loan Program are charged a loan fee which is deducted from the amount that is disbursed. The Higher Education Act set the Direct Student Loan fee at 1% and the Direct Parent PLUS Loan and Direct Graduate PLUS Loan at 4%. However, as a part of the Budget Control Act of 2011, each year the Office of Management and Budget (OMB) adjusts the fee annually as of October 1st to add a charge based on the automatic deficit reduction. From October 1, 2020 to September 30, 2021, the Direct Student Loan fee is 1.057% and the Direct Parent PLUS Loan and Direct Graduate PLUS Loan is 4.228%.
Although these loan fees are disclosed in the promissory note and reviewed during loan counseling, most families don’t really think through how the student loan fee is calculated. That is changing for you today.
- Determine the amount borrowed.
- Change the student loan fee percentage rate into a decimal.
- Multiply the amount borrowed by the student loan fee percentage to get the student loan fee charge.
- Subtract the amount borrowed from the student loan fee charge to understand the net disbursement.
Example Federal Direct Student Loan Fees
Because so many borrowers take out the annual loan limit, we thought it would be helpful to calculate the loan fees for each year.
|Year in College||Annual Loan Limit||Loan Fee from 10/1/20 to 9/30/21|
|Undergraduate Senior & Beyond||$7,500||$79.28|
Remember that most loans have two or more disbursements based on the loan period. This means that if you are borrowing $5,500 for your first year in college, you will net only $2,720.93 for each disbursement after the loan fees.
Example Federal Direct PLUS Loan Fees
The loan fees for both the Federal Direct Parent PLUS Loan and the Federal Direct Grad PLUS Loan are the same. According to the College Board’s Trends in Student Aid, the average Federal Direct Parent PLUS Loan in the 2018-19 academic year was $17,220. Based on the loan fee rate for next year, the loan fee would be $728.06. Because the amount of Federal Grad PLUS Loans vary so much by program, just remember that for every $10,000 you are borrowing, the Federal Direct Grad PLUS Loan fee would be $422.80.
Pro Tip: Since many borrowers are using the Direct PLUS Loan to zero out their college tuition bill, borrowing the balance owed will still create a balance due to the loan fees. When you request your loan amount, ask to borrow your loan fee. If your college tuition bill shows a $6,276 balance, then you will need to borrow more than double that amount to get to a zero balance.
- Calculate the amount for the year: $6,276 x 2 = $12,552
- Calculate the loan fee: $12,552 x 4.228% = $530.70
- Add the loan fee to the net loan amount: $12,552 + $530.70 = $13,083
Private Student Loans Almost Never Charge Loan Fees
Most Private Student Loans charge no fees. Instead the lenders incorporate the cost of processing the loan into the interest rate. Always check with the lender to ask if they charge a loan fee and determine it will be deducted from the disbursement or added to the borrowing amount.
Calculating student loan fees does not have to be daunting. Understanding which student loans have them and how they are deducted from disbursements ensures that you are prepared for your college tuition bill. If you want help estimating your college borrowing needs for all 4 years of college costs, use Quatromoney’s free platform to calculate these college financing costs in a matter of minutes.
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.