Editorial Policy

Paying for College with Credit Can Backfire

Marcia Frellick

September 24, 2012

As escalating college costs collide with strained family budgets and high unemployment, parents and students might consider reaching for the credit card to make it through the next tuition payment.

Some may think the risk of high-interest debt will pay off in the form of a higher income after graduation. But sometimes that gamble backfires, as demonstrated in an August 2012 report from research and advocacy group Demos. In February and March 2012, researchers surveyed low- and middle-income families — and 13 percent of them that used plastic for education expenses saw their college students drop out to get a job and deal with the debt.

Yet, for many, credit cards are the only — or most convenient — source of funding. Here’s what to know before charging your education.

Why college students turn to plastic
The short answer: College is expensive.

The annual cost at four-year, private, nonprofit colleges averaged $38,589 during the 2011-2012 school year, according to the College Board. According to the Department of Education’s latest strategic plan, the cost of attending public four-year institutions grew 6.5 percent per year from 2001 through 2010. If this trend continues, the cost of a public education in 2016 will be more than twice the 2001 cost.

“College is still out of reach and people are turning to high-interest credit cards to meet those costs in addition to the many challenges we’re facing with student loans,” says Amy Traub, senior policy analyst at Demos. “That should really be a warning sign since we’re considering budget cuts at the federal level that would reduce student aid significantly. That will only make all of these problems much worse.”

Those who use credit for college expenses choose them for three main reasons, suspects Michelle Asha Cooper, president of the nonprofit Institute for Higher Education Policy, which promotes access to education.

  1. They see credit cards as fast, easy and convenient.
  2. They aren’t aware of lower-cost options.
  3. They turn to credit cards and banks because they are more familiar with these sources of cash than they are with educational loans.

For students in a financial bind, the convenience of credit can be the biggest draw. For example, if a student is faced with classes being dropped because he or she can’t make a tuition payment, using a credit card may work as a quick fix, no extra forms or loan applications required, says Gail Holt, senior associate director of student financial services for Mt. Holyoke College in South Hadley, Mass.

“If it’s a small amount and it buys you time to stay enrolled,” using a card can be a good thing, Holt says.

Maybe you need more time to collect a few paychecks or are anticipating a gift from a relative. If you can get a low-interest card and have a plan for paying it off in a year, using a credit card may be an acceptable choice, Holt says.

For strategic students, credit cards offer another perk — education costs are large, and if you pay off the balance, you can rack up a hefty stockpile of rewards points and miles.

Also, though it’s never a reason to choose credit cards as a payment option, credit card debt can be discharged in bankruptcy, whereas student loans can’t be. And when accepting credit card payments, many schools add a small surcharge (2 percent or more) to offset the costs of credit card processing.

Other (better) options
Despite the advantages they offer, the convenience of credit can leave students deep in debt. Credit card interest rates are now averaging 15 percent, and that might be too much for recent grads — the average senior faces more than $23,000 in debt, according to the Federal Reserve Bank of New York.

So, if your college allows credit card tuition payments, Cooper says, this choice should come only after you’ve exhausted other, lower-cost government loans, including:

Subsidized Stafford loans: These are federal loans based on financial need. The government “subsidizes” these loans by not charging you interest while you are in school at least half-time. Dependent students (meaning your parents’ income is considered on your loan application) can borrow at 3.4 percent up to $3,500 in subsidized loans freshman year, $4,500 for the second year and then up to $5,500 for the third year and beyond. Subsidized Stafford loans are no longer available to graduate and professional students.

Unsubsidized Stafford loans: These government loans are not based on financial need, and the interest clock starts ticking right away. Dependent students can get $2,000 a year (independent students, meanwhile can borrow $6,000 per year) at 6.8 percent interest, still less than half the average interest rate for the average credit card. Neither the subsidized nor unsubsidized loans requires a credit check.

Federal Parent PLUS loans: These are federal loans for parents available at a fixed interest rate of 7.9 percent and a 3 percent origination fee. Parents who pass a credit check can borrow up to the cost of their child’s education. But the recession made passing that credit check harder as families’ incomes started to slide.

“With the recent changes in the economy, more and more parents are not actually passing that credit check,” Cooper says. If the parents don’t pass, students are given the option of taking out more in an unsubsidized loan, she says.

If you find yourself in trouble
Although students and their families may know about the lower-cost loan options, they might wary of loans and go with the payment source they understand better — credit cards —  “even though that’s a much worse option,” Cooper says.

If you find yourself on the brink of dropping out of school to deal with unmanageable credit card debt, talk with an academic adviser and the financial service office before taking that drastic step, Cooper says. Students wrestling with debt, in addition to academic pressure, may need to get the perspective of a professional. Your school likely has professionals on staff who can help you look at the broad financial picture, make sure you examine all available options and put together a plan.