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Monday, April 15, 2024

Next target in Biden vs. Junk Fees: Colleges and student lending

(NerdWallet) – President Joe Biden, in his ongoing crusade against hidden junk fees, has so far cracked down on event ticketing, airlines, financial companies and rental housing. The next target: junk fees at colleges and in student lending.

On Friday, the Biden administration announced several new actions to alleviate the burden of these superfluous fees. The most significant would be the elimination of origination fees for federal student loans — if it passes muster with Congress.

“We feel strongly that there are times where the American consumer is kind of played for a sucker,” says Neera Tanden, domestic policy advisor to Biden. “There’s a hidden fee or there’s some way in which a company or an entity is basically using its market power to make you pay a fee that you shouldn’t have to.”

Junk fees are the label given to the irksome and often surprise surcharges to what you’re already paying for. This includes things like credit card late fees, overdraft fees at banks, amenity and resort fees at hotels, service fees for event ticketing or food delivery, as well as seat selection fees on airlines. For over a year, the Biden administration has taken several actions to curb junk fees and surface hidden fees.

End student loan origination fees

On the student lending side, Biden would eliminate the student loan origination fee as part of his 2025 budget proposal.

Origination fees are the percentage of the loan amount that’s considered a processing fee. The fee ends up being tacked on to loan balances, which means borrowers would pay interest on the fee over the life of the loan. Origination fee rates range from 1% for undergraduate loans to 4% for graduate and parent PLUS loans.

Tanden, who spoke with NerdWallet in an exclusive interview, calls origination fees a “relic of the past” when private lenders originated student loans backed by the government, which hasn’t been the case since 2010 when the federal government began exclusively lending directly rather than guaranteeing loans made by private financial institutions. She adds that there’s no current rationale for it in federal student lending.

Borrowers collectively spend more than $1 billion annually on origination fees, according to a release by the administration. However, Biden can’t get rid of origination fees unless Congress approves it as part of the nation’s 2025 budget.

Tanden says she hopes the proposal will be treated as a nonpartisan issue. “We know that Republicans have welcomed ways to cut back on taxes for people,” she says. “This is really just a tax on student borrowing.”

If origination fees are eliminated, it would impact future student loans only, not existing debt.

Eliminate junk fees with student banking products

The college-related fees Biden is targeting include “high and unusual fees” associated with student financial products. Colleges and universities often offer bank accounts and credit cards as part of affiliations with financial institutions. These fees include insufficient funds fees, maintenance fees and closure fees.

Biden wants to block financial companies that partner with colleges to disburse Title IV funds (such as student loans) from charging fees to students. The administration says these junk fees are out of step since banks have largely phased them out.

The measure to end junk fees for college banking and student credit cards is currently in the formal process known as negotiated rulemaking. Though it doesn’t require approval by Congress, don’t expect a change anytime soon.

Empower students to authorize tuition charges for textbooks

Many colleges and universities have long included textbooks as part of students’ tuition bills. That means that the charge is automatically included and students have to pay for course materials regardless of the actual costs available on the market. Students might be able to find textbooks cheaper somewhere else, but colleges still bundle those anticipated costs as part of tuition.

Biden is proposing that students be required to authorize a charge on their tuition bill for textbooks and other required materials for their courses. The administration says these changes would provide students with the opportunity to do a cost comparison to find the cheapest options or eliminate the cost altogether by accessing free open-source textbooks.

“The college has a lot of power and sway and these are ways that, you know, essentially consumers — your students — are forced to pay for things that they should be able to look at cheaper costs,” says Tanden.

These changes are also in the negotiated rulemaking process and don’t require congressional approval.

Require colleges to return unused ‘flex dollars’ and meal plans

Students are often required to purchase meal plans with their college or university, which are used for dining hall meals or as “flex dollars” to pay for food elsewhere on campus. But at the end of each semester, schools can rescind any remaining funds. That means students must spend the money before the semester ends or forfeit what they’ve already paid for — often with student loans.

“Students are often taking on debt in their college years to pay for the cost of living, as well as their tuition, and because of interest that could grow in cost,” says Tanden.

The Biden administration would halt colleges from taking leftover funds and instead require them to return the remaining dollars to students.

The administration announced it is now formally considering this regulation. It would need to move through the negotiated rulemaking process and wouldn’t need approval by Congress.

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