Think Twice When Charging Tuition Costs
By: Brian O'Connell

College students – and their parents – who use credit cards to pay their tuition are increasingly facing surcharges of up to 3% of the total purchase price by colleges looking to trim operating costs.

The idea behind paying college tuition with plastic is increasingly a survival-based one. With student financing harder to get, and parents’ bank accounts depleted due to the harsh economic climate, the thinking goes, credit cards are a last resort measure to earning that sheepskin. Another school of thought is that, with a student credit card, which typically has lower interest rates than a regular credit card, students don’t have to pay off the debt all at once – they can space it out over the course of a semester – or even a full school year.

But using a credit card, even a student card, isn’t as advantageous as you’d think. For starters, credit card interest rates are, on average, higher than the rate on a student loan.

Using a credit card to pay tuition and other college bills also springs a financial trap that can take years to escape. According to a 2006 study by the American Council on Education, more than 50% of students had at least one credit card in 2006. About 25% used a card to pay their tuition. But 55% of students who relied on a credit card to pay their tuition bill carried a balance, as opposed to 38% of students who did not use card to pay their tuition.

And, according to a new survey by Sallie Mae (Stock Quote: SLM), the average college student carried a whopping $3,173 in credit card debt in 2008. Compare that to 2004, when students carried an average of $2,169 in credit card debt. Sallie Mae also reports that college students charged, on average, $2,200 toward college costs – up 134% from 2004.

Now colleges are making it even more financially undesirable to use a credit card to pay their tuition. USA Today reports that a growing number of colleges are adding a surcharge to tuition bills paid for by plastic. The University of Southern Maine, for example slaps an extra 2.75% on tuition bills covered by a credit card. The University of Virginia, Northwestern and George Mason are among other schools following suit.

The reasoning is simple. Colleges are charged an average of 2% to accept a credit card payment, according to Nilson Reports, a financial payments publication. Historically, colleges and universities have swallowed the card surcharges, but with a depressed economy and weaker endowments and government funding (for state schools) colleges are turning over every rock they can to find ways to cut costs. Through that prism, flipping the card surcharge over to students is a tried-and-true survival tactic that retailers have been using for years against their card-carrying customers.

The results speak for themselves. At George Mason, the controller’s office estimates that the school will save $1.5 million by adding a 2.75% surcharge to students and families paying tuition bills via credit card. The university estimates that 50% of its students use credit cards to pay tuition, thus increasing the financial value of passing along card costs to students.

The writing on the wall is clear. Using a credit card to pay your college bills can lead to a vicious downward financial cycle. Now with card surcharges, the burden for paying for school with plastic is becoming even more burdensome.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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