Study Now, Pay Later May Be a Poor Choice
David was heading into his sophomore year at the state university. After a summer of leisure and some part-time work, he was getting ready to return to school when disaster struck. His father, the family’s main income generator, was laid off from his job. There was no severance pay with the pink slip, leading to a severe cash flow crunch for the family. The bills for the mortgage, food, utilities and the car kept arriving on a regular schedule.
Suddenly, the ability to write a tuition check for David’s fall semester was in doubt, and most of the deadlines for financial aid had been missed. With the University demanding payment by the first day of classes, the family was suddenly faced with a financial crisis. They needed to come up with several thousand dollars in a hurry, or David would have to hit the bricks and start looking for work.
While raising a few thousand dollars sounds like it’s not an impossible task, it’s a bridge too far for many Americans. The Wall Street Journal famously reported that nearly half of Americans “definitely or probably” could not come up with $2,000 if they needed to in an emergency. In the U.S., 24.9 percent of the surveyed said they were certainly able, 25.1 percent probably able, 22.2 percent were unable, and 27.9% certainly unable.
The reality is that we live in a world where low incomes, multiple growing and hungry children, and unexpected job losses result in many families living paycheck to paycheck. Savings rates – the amount of money that you deduct from disposable income as a nest egg - are near historic lows, according to government statistics, hitting 5.50 percent in December of 2016. That means if disaster strikes, families and individuals are stranded on a metaphoric island in the ocean.
THE PLASTIC PATH
Fortunately, David’s family had a solution at hand. Before his job loss, David’s father had acquired a new credit card with a relatively large credit limit. Although it was intended for medical emergencies, the family decided they had no choice but to turn to it for the tuition payment so that their son could continue in the state college.
David’s family is not alone in their hand-wringing over the issue of tuition payments. One of the biggest expenses many families face each year is college or trade school tuition, and in some locations, for private schooling in elementary and high school where the public options are unpalatable.
The College Board, a non-profit that specializes in training for the Scholastic Aptitude Test (SAT) and Advanced Placement Program, reports that the average cost of tuition and fees for the 2016-2017 school year in the U.S. was $33,480 at private colleges, $9,650 for state residents at public colleges, and $24,930 for out-of-state residents attending public universities.
That’s average, mind you, and doesn’t include books, room and board, travel, or pizza. There’s hardly any wiggle room, either. Tuition must be paid, or a payment timetable established, before services are rendered or, at the least, before the drop/add deadline for any credited coursework. Miss those deadlines and it’s sorry, but you are not enrolled.
It’s a financial burden that few families beyond the extremely wealthy can easily handle, so innovative solutions are often the only solution. One path being chosen by an increasing number is the path David’s family chose, financing tuition via credit cards.
CreditCards.com reports that roughly 85 percent of public and private colleges will take plastic for tuition payments. But 57 percent of those charge a service or convenience fee for that method of payment. The fees are varied, but most are pegged at 2.75 percent of the amount charged. That amounts to hundreds of dollars tacked on to the tuition bill.
BEATING THE SYSTEM WITH REWARDS
Some families think they’re getting over on the system by paying with credit cards in the hope of attaining the rewards associated with spending, like frequent flier miles. Unfortunately, the fees associated with the transaction often wipe out any advantage gained, and if the balance is not paid off, the accumulating interest further obviates any reward.
Some credit card companies prohibit fees on tuition payments, but that’s rare. Instead, educators and those concerned with the rising costs of education point students toward other options, including cash, checks, payroll deductions, student aid, and tuition vouchers. That’s nice if they’re available. In many cases, they’re not, and the accumulating debt of the large expenditures can be crushing to many, leading to drop-outs or other issues.
Of course, paying with a credit card may be the only option, and despite the fees, you’ll be glad that the service is offered. CreditCards.com also reported that 35 of the nation’s 100 largest private colleges didn’t offer the option. Of the 300 public, private and community colleges, a robust 85 percent would take plastic, but 60 percent charged a fee.
Colleges charge the fee because of the costs associated with processing credit card transactions. Many retailers follow the same practice, but the cost of the fees is disguised in the price offered to consumers. While 2.75 percent is not a large amount, multiply that by hundreds, if not thousands of students, and you have a significant revenue shortfall to the colleges.
The only good news for consumers is that card companies continue to battle to attract new customers. Zero percent introductory rates are being extended, and the rewards are getting more lucrative, particularly for balance transfers. Just be sure to do the math before using them to finance the big-ticket tuitions, particularly if you’re going to carry a balance.
The only other positive to paying tuition with credit is to have a long-term outlook. If you are going to go into debt, it is better to use it for something that will lead to a larger gain in the future.
Certainly, getting good grades at a prominent college with an eye on a professional career in law, medicine or engineering can be a wise investment, and certain technical and science majors offer solid job opportunities for graduates. Investing in yourself is usually a good call, and if you have to forego the occasional pizza to attain your dream, it’s a small sacrifice toward a better future.
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