Unable to come up with the cash for steep college tuition bills all at once, many families opt to pay the tab over time. Such plans can be helpful for families trying to spread out college costs.
However, a new report by the Consumer Financial Protection Bureau warns of a number of risks associated with these payment plans, including snowballing charges and aggressive collection practices.
It is important to carefully review the terms before signing up for these plans, experts say.
"Tuition payment plans offered by schools may look like a good option, but this report shows student borrowers can end up paying high fees, be forced to sign away their legal rights or even have their transcript withheld by their school," said Rohit Chopra, the CFPB's director, in a statement.
Nearly 4 million students use payment plans
Nearly all colleges offer some sort of tuition payment plan, the CFPB found. Close to 4 million students may use the option each term, according to bureau estimates.
While colleges market the plans as an alternative to student loans, families should understand they're in effect taking on debt when they sign up for them, the bureau says.
Under the plans, tuition and other education expenses are typically spread out into several payments over a semester or academic year.
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The plans can be administered directly by the school, or by a third-party payment processor. In cases of the latter, families may not always know with whom to communicate if they're struggling to meet a bill or just have questions about the plan's terms, said Elaine Rubin, director of corporate communications at Edvisors.
"Students often are confused on how to resolve issues with the payment plan and may not understand the full role of the third-party servicer," Rubin said.
Most college payment plans are interest-free, but there can be enrollment fees and other charges involved, the CFPB found.
Higher education expert Mark Kantrowitz has also noticed how the plans can become costly.
"If the family misses a payment, some tuition payment plans may be converted into private student loans with unfavorable terms," he said.
Risks rise for those who fall behind
The CFPB's report outlines the risks to students with these plans if they fall behind on payments. The penalties, it points out, can be more severe than with federal student loan delinquencies.
Late fees can be steep, with some colleges and payment processors dinging people more than $100. (The average late penalty was $30.)
At least 1 in 3 colleges reserve the right to withhold students' transcripts as a debt collection practice. Some institutions also report late payments to credit bureaus.
"In some cases, students could risk removal from classes, meal plans and campus housing when they miss a payment on a tuition payment plan," the CFPB warned.