College tuition payment plans: an alternative to loans

WASHINGTON - It's four months until the start of the fall semester at San Jose State University and Matt Wallner has figured out how he's paying for school.

Wallner, 29, didn't receive any scholarships or grants to transfer from Cabrillo College, a community college in Aptos, Calif., to the state university. All the university offered him were loans to cover the $7,500 in tuition and fees, but Wallner wants to avoid taking on debt to finish school. And it turns out he could.

San Jose State is one of many schools that offer monthly payment plans that let students spread out the cost of school over the fall and spring semesters. This can be a great alternative to borrowing money to pay all at once, but there are some questions students should ask before signing up.

"It's a way to make college affordable and help families budget their funds, but you have to check the terms," said Megan McClean, managing director of policy at the National Association of Student Financial Aid Administrators, a trade group.

Schools typically outsource the management of their plans to companies such as Tuition Management Services, Nelnet and Higher One.

Tuition Management, for instance, offers three plans that are broken up into five, 10 or 12 payments over the course of two semesters. The company charges an enrollment fee of $45 to $65 depending on the duration of the plan, and a $40 late payment fee.

Enrolling in such tuition payment plans usually cost less than $100 a year. Students can use the plans to pay for tuition, fees, on-campus housing and meal plans. Most schools only offer the plans for the fall and spring semesters, not summer or winter terms.

There are usually no added charges for payments made by check or direct debit from a bank account, but payment companies do hit students with fees for using a credit card.

At San Jose State, which runs its tuition plan in-house, there is a 2.75 percent fee assessed for every payment made by credit card. That would add $206 a year to Wallner's tab. He plans to steer clear of using plastic to make his $875 a month payments during the fall semester. If Wallner is ever late with a payment, he will be charged $20.

He figures he can set aside money from his job at a local radio station to cover the monthly payments. It will cost Wallner $33 a semester to enroll in the tuition plan, which he is not thrilled about.

"We were told during orientation that there are just under 15,000 transfer students entering in the fall. The yearly payment plan fee for just those students is nearly a million dollars for the school," he said. "A fee charged for wanting to make installments?"

Still, compared to the interest Wallner would have likely paid on a loan, he said the tuition plan is not such a bad deal.

Interest rates on federal student loans are currently fixed at 4.66 percent, but will be reset this June. Private student loans, meanwhile, can carry interest rates as high as 7 percent. And both the government and private lenders charge a one-time fee for making the loan.

But college is expensive. Once families subtract scholarships and grants, it can cost them anywhere from an average of $12,830 to $23,550 to send their kids to a public or private four-year college. With that kind of bill, even monthly payments may be too large to handle.

"It is really important to think about what you can afford without stressing your family budget," said Reyna Gobel, a financial curriculum specialist at IGrad.com, a higher education website. "It's OK to take on some loans. Look at it as part of a package, instead of just the ultimate way to pay for your child's college education."

As a student at the University of Nevada Las Vegas, Gobel recalls using the school's tuition plan to cover costs when her student loan disbursement was late. All of her classes were going to be dropped for the semester, so she turned to a payment plan in a pinch.

It's unclear how many families are using tuition payment plans, since the management companies would not share how many clients they have. By most estimates, 90 percent of private and public colleges offer the plans as an option.

"These plans are best when you use them as a tool to manage how much you borrow," said Kevin Fudge, manager of government relations and community affairs at the nonprofit American Student Assistance. "Instead of borrowing $10,000 to fill a gap, you could use a payment plan to cover $5,000 and borrow the rest."

Fudge encourages families to have students pay a portion of the monthly payment. Giving students a financial stake in their education tends to make them more responsible and focused in college, he said.

"If a student is taking out loans, they're not making payments and not seeing the affect. However, if they are splitting the cost of a tuition plan ... it makes the experience more real," he said.

For Wallner, breaking up his payments will help achieve his goal of graduating debt free. Wallner got through community college without any loans and plans to do the same as he pursues a bachelor's degree in public relations.

• Douglas-Gabriel covers the economics of education, writing about the financial lives of students from when they take out student debt through their experiences in the job market.