Why fees and interest charges make credit cards worse than student loans.
It’s no secret that there’s a student loan debt crisis in the U.S. and that many students are finding it tough to make ends meet, but a new trend in college tuition payments has the potential to make a tough situation even worse. A new report from CreditCards.com finds that more and more, institutions are allowing students and parents to make tuition payments by credit card.
The issue they report is that fees for this type of credit usage are on the rise – these “convenience fees” now average 2.62% of the transaction. So a student or parent who pays $10,000 to cover tuition can expect fees of $262 to be added on. This fee is applied every time the payee conducts a transaction. That could mean one fee or more per semester and as the report states, over a 4-year degree those fees could really add up.
However, Consolidated Credit’s President Gary Herman sees a larger problem buried in with this story of fees – namely, that people trying to fund a college education on a credit card are at extremely high risk for financial distress caused by credit card debt.
“A student loan can be hard enough to pay back and that interest rate is usually going to be less than 10 percent,” Herman explains. “On a credit card, the interest rate applied to the debt can be 20 percent or more, depending on the card. And since tuition isn’t cheap you may be taking on a high-interest debt that will be extremely difficult to pay back even with an aggressive debt reduction plan.”
Let’s take the example used to show the trouble with fees above. If a student put $10,262 (tuition plus fees) on a credit card that started with a zero balance:
- On minimum payments at just 15% APR it would take 282 months to pay off the debt and total interest charges would be $9,898.79 – almost doubling the total cost of that tuition payment
- On a rewards credit card at 21% APR it would take 447 months to pay off with total interest charges of $22,987.05 – so the total cost more than triples!
- Even if you set fixed payments of $500 per month, at 15% APR it would take 24 months to pay off with $1,670.47 in interest charges
- At 21% APR on $500 fixed payments, you’re looking at 26 months with $2,563.94 in interest charges
And unlike a student loan, that amount is not deferred until after the student graduates; it has to start being repaid immediately. That can be tough to do as you try to finish an undergraduate or graduate degree.
“Convenience fees on credit card transactions certainly add to the cost to create a larger burden on the payee’s budget,” Herman agrees. “This is the same costly trend we reported with paying child support by credit card. However, in this case it’s worse because the likelihood of paying off tuition debt expediently to minimize interest charges is low, meaning the financial burden is high.”
Herman’s advice is to avoid using credit cards to pay for school unless you have income in place and a plan to pay the debt off quickly to minimize how much interest charges and fees increase your cost.
“If you’re already at your borrowing limit and you can’t get a loan, then using a credit card may be your only option,” Herman concludes, “but don’t turn to credit without considering your other lending options first. As bad as the student debt crisis is, the personal credit crisis you create by paying tuition with a credit card has the potential to be much worse.”
For more information on credit card debt relief, visit Consolidated Credit’s guide to 5 Options for Debt Relief. You can also call us at 1-888-294-3130 or complete an online application to request a free debt analysis from a certified credit counselor to learn about the best option to use in your situation.