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Tuition Payment Plans – Hidden Gems to Pay for…

Jan 22, 2020

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 

Interest Rate  Interest Paid  Total Due  
4%  $1,031 $3,431 
4.5% $1,178 $3,578 
5% $1,329 $3,729 
5.5% $1,484 $3,884 
6% $1,644 $4,044 
6.5% $1,809 $4,209 
7% $1,977 $4,377 
7.5% $2,151 $4,551 
8% $2,328 $4,728 
8.5% $2,511 $4,911 
9% $2,698 $5,098 

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. 

When you buy expensive things -- a TV, a car, a house --, you most likely take more and more time to carefully consider the risks, rewards, and probable outcomes associated with the purchase as the price increases. No one wants to waste hard-earned money. In addition to knowing the purchase price, you will likely have a good handle on the ultimate cost, including after-purchase expenses such as maintenance and insurance. This is true for nearly all consumer transactions -- except for purchasing an education.

That sounds odd, doesn’t it, “to win the financial aid game.”  You don’t have to stretch very far to see that the financial aid process has characteristics of a game: there is a rulebook, a referee (the U.S. Department of Education), a defined time period and rewards at the end for the winners.  Unfortunately, as we’ve recently learned, there are cheaters too.

On October 1, the Free Application for Federal Student Aid (“FAFSA”) will be available. High school seniors and college students continuing into Academic Year 2020-21 will need to file a new form to be eligible for aid in the 2020-21 Academic Year. FASFA allows students to participate in federal student aid programs, including the Direct Student Loan Program, the Pell Grant Program, Work-Study, and other federal aid programs. Without filing, students will not be eligible for these programs.