Subsidized Federal Direct Loan Question...

[SnowTown]

I just want to make sure I got this right.

I'm a medical student. For subsidized federal direct loan, you don't accrue interest while you're still in school. But there is a total of 4% fee (3% origination fee + 1% federal default fee)?

So say if you're awarded $1,000 per year of subsidized federal direct loan. At the time of graduation you owe 1,000 x 4 = $4,000???

But you really only get $960 per year because of the 4% total fee?

Is there anything that I'm wrong about?

Thanks.

---

Members don't see this ad.

 

[SketchLazy]

I just want to make sure I got this right.

I'm a medical student. For subsidized federal direct loan, you don't accrue interest while you're still in school. But there is a total of 4% fee (3% origination fee + 1% federal default fee)?

So say if you're awarded $1,000 per year of subsidized federal direct loan. At the time of graduation you owe 1,000 x 4 = $4,000???

But you really only get $960 per year because of the 4% total fee?

Is there anything that I'm wrong about?

Thanks.

The way subsidized loans work is that the interest on your loans are paid by the federal government when you are in school and possibly when you're in residency (if the 20/220 pathway is still around by the time you get to residency). The default fees and origination fees are taken from the principle amount you borrow each year, so you are right. If the fee rates are 1% + 3%, then you will get $960 for every $1,000 you borrow. However, when you do go into repayment you will be accruing interest on the full amount you borrowed and paying back the full amount, which is $4,000 in your example. The bank keeps the origination fee for providing your loan and the default fee is money they keep in case you can't pay your loan back.

 

[SnowTown]

Thanks for the response. So the default is a sort of insurance policy for the lender? 1% seems kind of low for that?

So 1% default fee is sort of like a deposit for say renting an apartment. And that 1% will count towards repayment when someone repays the loan?

Thanks again.

 

[TMP-SMX]

If you can find a lender without the origination fee you will be much happier.

 

[AMDFAO]

The loan fees for Direct have dropped to 2.5% but you get a credit back of 1.5% (called a rebate) so the total lost off the top is .5% for this upcoming year. In order to keep the 1.5% credit, a borrower would need to make their first 12 payments on time. If you were to consolidate the loans with another lender, Direct would add back the 1.5% when they sold it along with any interest that would have accrued on that piece since you never made the 12 payments. Making 12 payments should not be that hard no matter what your income with Direct income contingent payment plan even if you are earning a full time Walmart salary.
Lenders paying fees will most likely add them back on if you elect to consolidate it later since the benefit is tied to timely payments so shopping the market for simply "no fees" may not be the best tact to take. The likelihood of that lender changing the fees for the next year is a risk. What then? Go to another lender? I tend to think that if you are lender shopping from year to year to avoid fees becomes a bit of a waste if in the end you untimately want 1 lender/ 1 payment and a longer repayment period (that's why consolidation came into being: kids with multiple lenders and all their loans in a 10 year repayment based on the balances unlike a 30 year if they were all with the same lender). I'm fairly certain that if you have chosen a lender that will simply be selling them after funding to to the feds, they'll want their loan fees this year.
I think in the long run, Direct is still trying to simply reduce the fees which they tried at one point and all the lenders complained it was "unfair" since the lenders couldn't just reduce the fees (but had the profit to pay them for borrowers) thus Direct invented the "rebate" concept to get around the whining of the lenders who want to keep their business and their profits.
For a Direct GradPLUS the loan fees are 4% but the rebate knocks the amount lost down 1.5% to 2.5% off the top.
The default fee covers the insurance for the lender in case you don't pay them back. The origination fees cover the cost of processing the loan itself.