What is Origination Fee in Education Loan?

While most of the crucial time of a student shifts to interest rates, other significant expenses get missed. If you are also confused about these other charges, then you have landed on the right page. In this blog, we are going to discuss about origination fee. This charge is charged by all the lenders to process your loan application; however, this is often misunderstood by the students, which later causes a concern.

Keep reading and explore what is loan origination fee is, how it affects student loans, and what students should watch out for when evaluating loan offers.

What is Loan Origination?

Loan origination is the complete process that starts from the loan application to the disbursal. This process also includes formalities such as credit checks, documentation, and underwriting. Thus, you pay the origination fee for this service.

What is an Origination Fee?

The origination fee is also an upfront fee that needs to be paid by the student to process the new loan application. These are the administrative costs associated with granting the loan.

The loan origination fee is calculated based on a percentage of the total loan amount and is deducted when you request the loan disbursement. Therefore, it will always be less than what you actually borrowed.

How Do Origination Fees Impact Your Education Loan?

The loan origination fee on a student loan gets charged in three ways:

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  You pay the charges as an upfront fee.
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  Or the amount is added to your loan principal, otherwise
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  The amount gets subtracted from your first disbursed amount.

Let’s understand this with an example,

Suppose you took the INR 20 Lakhs, and the processing fee is 1% of the loan amount. So, now you have three options:

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  Option one, in which you pay an INR 2 Lakhs upfront fee.
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  Option two, where you get the INR 2 Lakhs in the principal amount, making the loan amount INR 22 Lakhs. 
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  Option three, where your first disbursement is INR 4 Lakhs, and you allow the deduction of INR 2 Lakhs from this amount. 

Options one and three are the best options, as in these cases, you avoid paying the interest rate on the loan origination fee.

What is Loan Origination Fee Charged By Banks?

In India, lending origination fees for education loans are charged by both private and public sector banks, as well as NBFCs and international lenders. Here's what you can expect:

Other Student Loan Fees

The origination fee is the only charge that the lender charges on the education loan; other fees are added on. However, not all lenders add these fees yet, knowing them would help you better:

Margin Money:

Lender is investing in your studies, and they want to ensure that you are serious about your studies. Thus, many lenders such as SBI, PNB, and other banks ask for the margin money. This is the amount that student needs to invest in their studies from their pocket.

Disbursement Fee:

Some lenders may charge a separate disbursement fee, which might include the transaction fee to abroad universities. The charges might be affected based on the country and lender.

Prepayment Charges:

While not as common, some Indian lenders charge large prepayment charges when you are paying off the loan early. 

Late Payment Fees:

When you miss the EMI payments even for one day, the lender charges a late fee to your education loans.

These student loan fees might vary depending on the lender; therefore, ensure that you are reviewing the fine print before signing the loan agreement.

How to Minimize Student Loan Costs?

When you are learning about these charges, one thing might come to your mind: how can you either avoid or decrease these charges? So, here are some of the tips that you can use to decrease your student loan fees:

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  Negotiate the origination fee if possible. You can do so by showing your strong academic record or a co-applicant with good income and a credit score. 
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  Look for waivers offered by banks or through tie-ups with educational institutions. You can look for other available scholarships. 
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  Apply through GyanDhan or just check your eligibility, which can help you find zero or low origination fee options.

Before agreeing to the loan agreement of a lender, ensure that you have explored all the possible options and have signed the loan agreement on the best terms. These expenses seem minor at start, but when they get added on, they impact your total costs, not just interest rates.

Conclusion

While the origination fee may seem like a small percentage, it adds up and causes financial hardship when you start the repayment. Always ensure that you are calculating the loan burden and comparing lenders before saying “Yes”.

Also, always enquire about the disbursement fee, loan origination fee, and upfront fee helps you make more informed decisions and avoid surprises. Remember, the true cost of borrowing goes beyond just the interest rate. In case you want to calculate the estimate of your expenses, use the GyanDhan EMI calculator and future earnings calculator to plan your future finances well.

Read More:

• 
  Loan Application Process for Public Banks
• 
  Loan Application Process for Private Banks
• 
  Banks Vs NBFCs
• 
  Lum Sum Payments on Loans

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