Private Student Loans - Understanding Fees
Lenders often charge fees when you borrow money.
The most common types of fees associated with private student loans are:
- Disbursement Fee - charged by the lender and added to the original loan amount (principal) when the loan is disbursed.
- Insurance Fee – deducted from each loan disbursement and paid to the lender to cover the costs of insuring the loan.
- Deferment Fee - charged for the benefit of deferring or postponing a loan payment for a period of time.
- Origination Fee - charged by the lender to offset the cost of processing a loan.
- Repayment Fee – charged by the lender at the onset of repayment; calculated based on the outstanding loan balance at the time repayment begins.
How Fees Are Paid
Fees can be paid in different ways:
- Fees may be deducted from the amount you borrow before the loan is disbursed. In this case, you will get less than the amount you originally requested when the loan proceeds are released, or
- Fees may be borrowed in addition to the approved loan amount. In this case, you will be able to use the total amount you originally requested when the loan proceeds are released but you will have to repay more money because interest accrues on the original amount borrowed (principal) plus any fees.
For example, if the lender assesses a fee of 5 percent and the loan amount is $10,000.00, the fee will be $500. One lender may take this fee from the principal, so you will actually receive $9,500.00. You must, however, pay back $10,000.00 to the lender, plus the interest. Another lender may add the fee to the principal and you will owe $10,500.00, plus interest and fees.
Be Aware of Miscellaneous Fees
Be aware of other charges, such as loan processing fees, and deferment and forbearance fees. Not all lenders assess these fees.
The key to understanding the fees associated with your private student loan is to read the promissory note before you sign it. This is a contract between you and the lender that says the lender will loan you money and you will repay it. Read it carefully, and do not hesitate to discuss it with the lender.