College planning is complex.
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Most families know that there are many ways to pay for college: savings, loans, grants, scholarships, financial aid, gifts from friends and family, income from a job, etc. Sometimes overlooked is a hidden gem that could reduce student borrowing and the total cost of paying for college: tuition payment plans. 

The concept is straightforward. Included in many, if not all, college bills is a brochure that introduces the family to a company that offers students an opportunity to pay some or all of the tuition in installments. For a fee (often between $50 and $100), these companies permit students to make up to 10 monthly payments from the start of the academic year rather than one larger lump-sum payment at the start of each semester. 

How do they work?

The payment plan company pays the college the amount that the student decides to pay with the plan. After collecting the up-front fee, the company then bills the student monthly. For instance, if the student elects to use a 10-month tuition payment plan to pay $2,400, the plan provider pays $2,400 to the college and bills the student $240 per month. 

Tuition payment plans can be handy ways to reduce the amount a student needs to borrow, and therefore the total borrowing cost.  For example, if a freshman borrowed $2,400 for a 10-year loan at 4% interest, the total cost of that loan would be $3,431: $2,400 of principal and $1,031 of interest. Depending on the fee, the total cost of a payment plan would likely range from $2,450 to $2,500. 

The chart below shows the total interest cost for a $2,400 loan to be repaid over 10 years at different interest rates.  For reference, today, students may borrow from the Federal Direct Student Loan Program at 4.53%. 

When comparing the one-time fee charged by tuition payment plan providers to the interest on a loan, there are two primary factors: (1) the interest rate on loan, and (2) the number of years until the loan is fully repaid. Most student loans have a 10-year repayment period, so we use it in the chart below. We also show rates well above today’s federal loan rate for cases in which borrowing is done under private loan programs that are likely to have interest rates greater than the federal loan rate. 

$2,400 Student Loan with 10 Year Repayment 

When students leave the nest, parents often find that they have more disposable income. Food bills are lower, gas seems to last longer in the car, and the miscellaneous other costs of having a child at home are reduced, sometimes substantially. Parents can use these amounts to pay-off the tuition payment plan. 

Students may also contribute income they are earning while in college.  Many students balance classes and a part-time job: work-study or another job could provide income to help pay a monthly tuition payment plan. 

Tuition payment plans are sometimes overlooked in the rush of trying to pay the college bill, but they can offer a relatively inexpensive way to pay some or all of the costs of college. Be sure to understand the terms, conditions, and fees associated with these plans and compare them to student loans. You may find that tuition payment plans can help your student reduce the total cost of college. 

In the 1990s, Congress passed legislation to create 529 college savings programs to help families create a nest egg for college. With terrific tax benefits and lots of flexibility to move money among beneficiaries, more than 13 million current account holders have saved more than $325 billion.  

With more than $1.5 trillion of student loan debt outstanding, a lot has been written about student loans. Not much has been written about the relationship between student loans and credit scores.