When money gets too tight for tuition, a growing group of students and their families break out the plastic, according to a recent survey. Experts and cardholders seem to agree that credit cards should only be a last-ditch financing tool. However, if you find yourself facing that situation, you do have options to help ease your burden.
According to an August 2008 Sallie Mae/Gallup poll, last year cash-strapped parents charged an average of $5,822 to help pay for their child’s higher education; the students themselves charged $2,542. Some blame a shrinking student loan market. Others say they turned to cards at the last minute, when no other options remained. Whatever the reason, the underlying fact is that the problem is real and unlikely to improve anytime soon.
The college crisis
With a faltering economy and rising college costs, more college students and their families are facing a cash crunch. While 8.9 million students filed for federal financial aid in 2008 — a 16 percent increase over the previous year — the money isn’t always available easily or quickly enough. Making matters worse was the exodus of more than 150 private lenders from the student loan market earlier this year, which decreased aid options and forced some families to scramble for last-minute loans. “This year, people got burned,” says Mary McGrath, an executive vice president and certified financial planner with Cozad Asset Management, in Champaign, Ill. “Some people put tuition on a credit card while they were still in the process of getting a new student loan company to take the place of the one they thought they had.”
Even when there’s not an economic crisis brewing, the money to pay for school isn’t always there when you need it. Sid Savara, of Honolulu, intended to work for a few months before starting a master’s program in computer science at USC in 2002. But an 11th-hour offer to enroll right away was too good to resist. “I had two choices that day: Either pay with a credit card or lose a semester while I saved up to go to school,” Savara recalls. He ultimately chose to charge the entire $10,000 tuition payment, then lived in spartan quarters and worked long hours to pay down his debt. “If I had been able to secure a traditional loan and pay it off over the years, I would have been more comfortable. We had a championship football team, but I had no money or time to enjoy a single game.”
|Four plastic-free ways |
to pay for college
1. Grants and scholarships. No matter what your family’s income, fill out a FAFSA early (available on Jan. 1) to get a shot at both need- and merit-based grants. Also, check out sites such as Fastweb.com to track down private scholarships for which you may qualify.
2. Current cash flow. Get a job, then use your income to pay for incidentals.
3. Federal loans. Available as part of your school’s financial aid package, federal loans such as Stafford and Perkins loans offer the best interest rates and the most flexible terms.
4. Private loans. Still short of funds? Work with a private lender. Interest rates are variable, based on your credit, and top out around 13 percent. Still, that’s probably better than your card’s rate — and the repayment terms certainly will be.
The price of plastic
As a college payment tool, credit cards aren’t all bad. Some families charge tuition to rack up reward card points — a good strategy if you have the money to quickly pay off the debt. A low-interest card can also be a godsend if your loans aren’t available for disbursement in time or if you need extra cash to cover a temporary loan shortfall. “When a student is confronted with not being able to register for classes, participate in the housing lottery or order transcripts, using a credit card may seem like the only option,” says Kathy Blaisdell, financial assistance director at Mt. Holyoke College, in South Hadley, Mass.
Still, experts agree that credit cards should be a last-ditch option for college financing. Although interest rates for federal student loans are variable, they carry rate caps — currently 8.25 percent for a Stafford loan — that usually beat credit card rates hands-down. Federal and private student loans also offer student-friendly perks that credit cards can’t match, such as the ability to defer payments while you’re in school and deduct the interest from your taxes.Adding insult to injury, more colleges are passing on card processing fees directly to the cardholder, which can tack an extra $900 onto a $25,000 tuition payment.
Dealing with your debt
Even smart students flunk out now and then, so if you’ve already used your card to cover college expenses, act now to reduce the damage and avoid piling on more debt next semester. Here’s how:
- Contact your financial aid office. If extenuating circumstances — a job loss, an illness — have left you with a shortfall between your family’s expected contribution and what they’re actually able to pitch in, ask your school’s financial aid office for a reassessment, says Kelly Tanabe, author of “1001 Ways to Pay for College” and owner of SuperCollege.com. “Explain to the financial aid office what’s going on so they can adjust your financial aid to accommodate you. In this economy, with a lot of people losing their jobs, they’re prepared to respond to that.”
- Get a loan now. Loans are available 365 days a year, so even if you’re late in the game, get the ball rolling by completing the FAFSA (Free Application for Federal Student Aid) online. You can expect a response within a week or two. Bonus: If your financial aid office disburses the loan in cash, you can use that to cover your card bill.
- Transfer your balance. After finding a credit card that offered a 5-percent interest rate for the first 12 months, Savara paid off as much debt as he could; once the teaser rate expired, he transferred the remaining balance to yet another low-rate card
- Sign up for TuitionPay. Available at more than 1,500 participating schools, the service allows you to pay tuition in 10 monthly installments rather than as a massive lump sum. With only a $50 fee and no interest, it minimizes how much you’ll need to borrow for school. Register at TuitionPay.com.
- Plan ahead. If your family has money in a 529 account, allow time for your request for withdrawal to be processed (or remember to turn in receipts right away to expedite your reimbursement).
College isn’t cheap. But figuring out how to get through school without piling up credit card debt may just be the smartest thing you’ll learn while you’re there.
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