Limit student loans with tuition plans to pay for college
For students heading back to school in the fall, summer vacation is a great opportunity to take a break from all of college's in-classroom stuff. Unfortunately, it's not as easy to get away from all of the out-of-the-classroom responsibilities – especially how you're going to pay for school.
At this point in the year, you should have received your financial aid award letter for the upcoming academic year. Hopefully, it includes enough scholarships, grants and federal student loans to cover 100 percent of your costs. If it doesn't, you're going to have to figure out how you want to fill the much-dreaded tuition gap.
Many students turn to private or alternative student loans from banks to bridge their gaps, and these are certainly a viable option provided you ask the right questions before signing on the dotted line. However, the Student Loan Ranger wants you to know you may have other options to avoid loans altogether. Yes, it's ironic. We know.
While fewer loans might mean less to write about for us, it would definitely mean a lot more happy college graduates. So, with that in mind, let's run through a few different options students and parents should consider before turning to student loans to cover a tuition gap.
Tuition Installment Plans
Many schools offer tuition installment plans to their students. Colleges sometimes call these tuition payment plans. These plans will split students' bills into equal monthly payments, often over a 10-month period or on a per-semester basis.
Some people use these plans to pay their entire tuition costs. For instance, let's say your school costs $18,000 a year. Instead of paying that lump sum through loans, you'd pay the school $1,800 a month for 10 months.
Of course, $1,800 a month is a lot of money. However, your monthly bills won't be as large if you use these plans to cover a tuition gap, rather than the entire tuition.
Let's say your school costs $18,000 but you've covered $12,000 of it through grants, scholarships and federal loans. That leaves you with a $6,000 tuition gap. Instead of borrowing a private loan and potentially paying interest and fees on that amount, you could opt for a tuition installment plan which would cost you $600 a month over the 10 month period.
Is It Worth It?
So $600 is still a decent amount of money to pay each month. However, it's also a more attainable amount, especially compared with what a private loan would cost you in repayment down the line.
For comparison, let's say you took out a $6,000 loan with a 9 percent interest rate and a 10-year repayment term. When you entered repayment on this loan, your payments would be about $76 a month.
Of course, that number isn't the key thing to look at in this equation. You want to pay attention to your time in repayment. You'd pay the $600 over 10 months and the $76 over 120 months. Over that duration, the private loan would cost you more than $9,000, meaning you'd pay your 150 percent of the original balance thanks to interest.
What to Watch For
Most tuition installment plans are interest free, but some do have fees or other charges. Before you commit to a plan, talk to your school about these costs.
Also, be aware of possible penalties if you fall behind on your payments. Make sure you know how much extra the school charges you, or if they will block you from registering for the next semester.
In addition, you may be able to have these bills directly debited from your bank account. Whether you choose that option or not, you will want to be sure you have a plan for covering your monthly payment amounts.
Additional Funding Options
When it comes to paying for school, you can't beat scholarships, since you don't have to repay them. Many scholarship organizations cut their winners a check, allowing them to use the funds toward eligible costs as they see fit. That means you could even use this funding toward loan payments if you already went that route.
In addition, you could consider putting the money owed on a credit card, with a few caveats in mind. First, you have to have a credit limit to support the amount you owe. Second, you'll want to choose the card wisely.
Sign up for one with a zero percent interest promotion, and have a plan to pay off the debt before that limited-time rate spikes. Otherwise, you could end up owing more than if you'd borrowed a traditional loan, only much sooner and without potential repayment benefits.
Not all schools accept credit cards for tuition payments. And if they do, they may come with a 2 percent to 3 percent fee. On the plus side, the cardholder may earn reward points that defray those costs; you'd want to check your cardholder agreement to see if these payments would be eligible.
This is a risky option, and it likely makes more sense for parents with steady incomes and credit histories who are helping their children with tuition.
Copyright 2015 U.S. News & World Report
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