Ed Money Watch

A Blog from New America's Federal Education Budget Project

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Student Loan Fees Increase Under the Sequester

Published:  March 4, 2013

Way back on August 1st, 2011, Ed Money Watch told readers that the debt ceiling agreement Congress and the President had just passed could affect federal student loans. The post explained the changes that the sequestration process set up:

Such across-the-board cuts [sequestration] would also affect student loans. The law [Budget Control Act of 2011 referencing the Deficit Control Act of 1985] requires that the federal government increase origination fees on all student loans to reduce the costs of the programs under a sequester, should Congress and the president fail to enact legislation to reduce federal spending by $1.5 trillion over 10 years.

As everyone knows, Congress and the President did fail, and the sequester was triggered on March 1st, 2013. But until a few days ago it was unclear how big the origination fee increases would be. A notice posted March 1st on a Department of Education website that serves financial aid administrators details the following:

For Direct Subsidized and Direct Unsubsidized Loans where the first disbursement of the loan is after the sequester takes effect, the current loan fee of 1 percent of the principal amount of a loan will increase. We presently anticipate that the rate will increase to approximately 1.05 percent. With such an increase, for example, the fee on a loan for $5,500 would increase from $55.00 to $57.75, an increase of $2.75. We will provide the actual increased percentage when it becomes available.

For Direct PLUS Loans for both parent and graduate and professional student borrowers where the first disbursement of the loan is after the sequester takes effect, the current loan fee of 4 percent will increase. We presently anticipate that the rate will increase to approximately 4.20 percent. With such an increase, for example, the fee on a $10,000 Direct PLUS loan would increase from $400.00 to $420.00, an increase of $20.00. We will provide the actual increased percentage when it becomes available.

The fees will affect any loans issued on or after March 1st, 2013. Since most borrowers have received their loans for the 2012-13 school year already, they will avoid the higher fees. But all loans issued in the future will come with higher fees.

[The Department of Education] plans to send email (and where necessary, paper) notifications to student and parent borrowers who have a Direct Loan where the first disbursement occurs during the period of the sequestration [March 1st or later]. The notification will advise borrowers of the increased loan fee percentage and advise them that if they wish to cancel or reduce the amount of the loan they should contact the financial aid office at their school.

Therefore the sequester does indeed cut the costs of entitlement programs – federal student loans are entitlements – just not the entitlement programs that actually contribute most to the federal debt and budget deficit. In case you missed the point here, Congress and the president have just reduced the cost of an entitlement program that has relatively few cost problems, to help address the massive cost problems in other entitlement programs (Medicare, Social Security, and Medicaid). Nice work.

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