End the student loan tax

There is a growing and warranted concern over student loan debt in this country. On a daily basis we are reminded about record levels of student debt, stories of struggling borrowers, and general anxiety among Americans about the cost of college. Add to this a little known fact that students and parents are actually being taxed on their federal student loans. It has to stop.

The federal government assesses on each student loan borrower an “origination fee.” The fee is a pre-determined percentage of the total loan amount and deducted from each loan disbursement. For the current academic year the fee amounts to 1.073 percent for Federal Direct Loan borrowers and 4.292 percent for Parent and Graduate PLUS borrowers.

{mosads}So, a parent taking out $10,000 federal Parent PLUS loan to help send their child to college would face a $400 origination fee.

But this is no origination fee; it’s actually a tax levied on some of our most vulnerable populations, and here’s why:

The term “fee” suggests that the funds collected will be used to administer some aspect of the program. The reality is that federal student loan origination fees are simply an artifact of the outmoded Federal Family Education Loan (FFEL) program, in which private lenders made federally guaranteed loans to students. Origination fees were originally imposed on borrowers in the 1980s as a temporary budgetary measure to help offset federal subsidies made to those lenders.

Since the end of the FFEL program in 2010, the federal government has been making loans directly to students and parents, and those origination fees aren’t used to offset any loan origination, but are rather taken right off the top of the loan as a tax on each and every student and parent. Borrowers of course have to repay the full loan amount, before the origination tax, with interest!

What’s worse, this tax is never included in the full cost of a loan. Whereas the law requires private loan providers to calculate and disclose the full cost of borrowing, including origination fees, federal disclosures only show the interest rates on the loans. After taking into account loan fees, the annual percentage rate on federal loans is higher than the government advertised interest rates.

Together, we are working to end this tax and provide some much-needed relief to today’s borrowers. The Fee Free Student Loan Act, introduced last month in Congress and endorsed by the National Association of Student Financial Aid Administrators (NASFAA), would eliminate this unnecessary, outdated, and regressive tax.

In the near future, Congress will consider the reauthorization of the Higher Education Act, and our offices will be working to ensure that members of Congress and Americans across the country understand why it is time for this tax to go. The more support we can gather on this important issue, the stronger the chance we have to help millions of federal student loan borrowers.

There is no doubt that the concern over student indebtedness extends far beyond the issue of origination fees. As a country, we have a responsibility to be doing more to assist students struggling with debt. But a good starting point is to agree to stop taxing our most vulnerable college-going populations.

Davis has represented California’s 53rd Congressional District since 2001. She sits on the Armed Services and the Education and the Workforce committees, and she introduced the Fee Free Student Loan Act in September. Draeger is president of NASFAA. 


The Hill has removed its comment section, as there are many other forums for readers to participate in the conversation. We invite you to join the discussion on Facebook and Twitter.

See all Hill.TV See all Video

Most Popular

Load more


See all Video