A new report from the CFPB (Consumer Financial Protection Bureau) delves into the risks students face when taking on a tuition loan.
The study, which explored various tuition payment plans that are currently offered by roughly 450 institutions, found that many students gravitate towards taking out a loan—especially if it’s something the college offers. Indeed, 20% to 25% of students at schools that offer a payment plan opt to use it.
Though these loans are typically interest free, unclear terms and unexpected fees put students at risk of accumulating debt.
Assessing the Risks
Unlike standardized disclosures for private education loans, tuition payment plans lack uniformity in their terms and conditions. This lack of clarity makes it challenging for students and their families to compare and assess the true cost of these plans.
There’s also the hidden fees aspect of tuition payment plans that don’t set students up well from the start. According to CFPB, 89% of the schools examined charge enrollment or set-up fees, which average $37, but can also come out to as much as $250. What’s more, 60% of institutions assessed in the study currently charge returned payment fees, which average anywhere from $29 to $65 per instance. Finally, late fees—charged by 44% of institutions—further exacerbate the financial burden, averaging $46 per late payment. Some institutions charge late fees as a percentage of the balance remaining.
It may come as no surprise that students have a hard time paying off their debts. But as with any loan, ensuring payments are made on time is important. In fact, some institutions resort to coercive tactics by withholding transcripts from students who fall behind on their payments. Roughly a third of schools investigated do so.
Institutions Are Teaming Up with Third-Party Providers
While the CFPB report focused on payment plans offered by the universities themselves, its research found that there are also several institutions that are partnering up with third-party companies that offer private installment loans.
Several buy now, pay later (BNPL) firms, including Klarna, PayPal, and Affirm have “partnered with bootcamp programs to offer education installment loans … and the private sector lending for education by BNPL lenders increased by 1028% between 2019 and 2021, indicating rapid growth in recent years,” CFPB reported.
Given how expensive education is in the United States, that acceleration in private sector lending that CFPB noted isn’t so shocking. Students have long relied on tuition plans and that will always be the case. However, it’s certainly more important than ever—as evident by how much the BNPL space has impacted consumer debt—that students assess all risks before signing onto any installment payment plan. It’s important they understand all the terms of the financial aspect of their education before accepting any of these payment plans, even if the details are opaque.
