Move over, student loans: there’s another trend for paying tuition in town.
You already use a credit card for practically everything, so why not just charge your tuition, too? This is what students and their families seem to be thinking as they look for new ways to pay for college. Between cash back, points, promotional 0% APRs, and airline miles, paying with plastic can reap rewards ─ but in this case, swiping can come with a catch.
There’s a hack for that
“Some may think they can game the system by using a rewards credit card to earn a little extra on top,” says Robert Harrow, Product Manager at consumer research site ValuePenguin.com.
Let’s say your credit card offers a 1% cash back reward with every purchase you make. Charging a semester’s worth of tuition would be an easy way to earn a few extra bucks, right? (To put that in perspective, $10,000 in tuition would give you a quick $100 back.) Or maybe it’s a convenient way to earn a free flight home for the holidays. That’s not too shabby.
But plastic comes with a price.
Out of 300 schools surveyed by CreditCards.com in 2016, 255 of them (or 85%) typically accept credit cards for tuition payments. Out of these, 145 schools, or 57% of those surveyed, charge fees for using a card. So, if you’re hoping to get a little something back after paying so much for school, you may end up disappointed.
According to the same survey, the average convenience fee schools charge for using a credit card is 2.62%. That $10,000 is now going to cost an extra $262, wiping out any rewards you may be earning just like that.
Think your student loan interest rate is high? Think again.
Still tempted to charge your tuition? If your school doesn’t impose a processing or convenience fee, it might be a worthwhile option. But be sure you’ll be able to pay the balance off in full at the end of the month. If not, a credit card should be used only as a last resort – and even then, it’s risky.
“If you're using the credit card for a larger expense, like tuition, you're probably not planning to pay it off right away. Credit cards usually have much higher interest rates than other financing options, including federal student loans and private student loans like the ones we offer at College Ave Student Loans, so you're going to pay a lot more in interest charges,” says Joe DePaulo, CEO and Co-Founder of College Ave Student Loans.
He’s got a point. Federal Direct Subsidized Loans and Direct Unsubsidized Loans, for example, currently boast an interest rate of 3.76%. Private student loans have higher interest rates, averaging anywhere from 9% to 12% - but that’s still considerably less than the average credit card APR, a whopping 15.18%, as reported by CreditCards.com in 2016.
On $10,000, that’s an extra $126.50 added right off the bat if it’s not paid off within the month.
“Using a card to pay tuition, and then carrying a balance is a big financial mistake,” Harrow continues. “The charges will quickly mount up, and a person may find themselves trapped in a cycle of debt.”
When it makes sense
“Credit cards can be a good option for smaller college-related expenses - food, transportation, books - as long as you're paying off the whole balance on time every month. They're convenient, a way to build good credit (if you use them responsibly), and come with a variety of rewards programs as a bonus. For parents, it can also provide a way to give your kids access to spending money with the ability to see how it's being spent,” DePaulo adds.
To pay tuition, though? Unless no convenience fees will be charged, and you can pay it off in full immediately, it’s not a good idea.
The bottom line
Simply put: “Using a credit card makes sense if you have the funds to pay the bill immediately or in a very short time frame. If you are going to be carrying a balance, you are most definitely better off using lower interest, longer term financing such as a federal student loan,” Joe Orsolini, a Certified Financial Planner at College Aid Planners, advises.
If you’ve maxed out your federal student loan options, don’t panic! You may be eligible for private student loans to help make your dreams of higher education a reality. Check out the private student loans offered from our lending partners before pulling out that credit card.