WASHINGTON—Students face risk when entering into agreements with colleges to spread the upfront cost of tuition into several, interest-free loan payments, according to a new report from the Consumer Financial Protection Bureau (CFPB).
The report, which looks at tuition payment plans offered by nearly 450 institutions, finds that “many plans have inconsistent disclosures and confusing repayment terms, putting students at risk of missing payments, incurring late fees, and accumulating debt,” the CFPB said.
In addition, the report, titled “Tuition Payment Plans in Higher Education,” also found:
- Many institutions withhold transcripts from students as a debt collection tool, a “potentially illegal practice that can have severe consequences for students trying to begin their careers or finish their education,” according to the Bureau.
- Some schools are partnering with third-party service providers to facilitate their tuition payment plans. The schools act as lenders, and commonly include enrollment fees, late fees, and other fees as part of the tuition payment plan.
A ‘Captive Market’
“Nearly four-million students each term are in some form of tuition payment plan arrangement with their school,” the CFPB said in releasing its report. “…While these payment plans can be a good option for some students, the plans can carry risk. And because of the unique circumstances in which schools offer tuition payment plans — sometimes making no other option available for meeting tuition payment obligations — students might represent a captive market in some situations.”
According to the CFPB, the report looked at public information on tuition payment plans from nearly 450 institutions’ websites. The CFPB said in the data it reviewed it found 87% of the institutions in the sample offer tuition payment plans directly to students, with 60% of those institutions offering payment plans outsourcing some repayment functions to third-party financial service providers.
Additional Findings
According to the CFPB, it also found:
- Even though these tuition payment plans are typically interest-free, students often encounter tacked-on fees.
- 89% of schools in the report’s sample charge an enrollment or set-up fee, averaging $37 and as high as $250.
- 60% charge a returned payment fee, averaging $29 per instance with two schools charging $65. “These fees are in addition to any nonsufficient funds fees that may be charged by the student’s financial institution.”
- 44% charge late fees at an average cost of $46 per late payment. One school in the sample charged students $300 for the first late payment, the CFPB said.
“These fees, when added on to the cost of the tuition balance, can create a high cost of credit,” according to the Bureau. “In particular, when the amount borrowed is relatively low and the enrollment fee is relatively high, students can face annual percentage rates as high as 237%.”
Potential Risks
The CFPB said the report identified other potential risks from tuition payment plans, including:
- Coercive debt collection practices. “Some schools examined in this report withhold transcripts from students who are behind on their payments, a practice that the CFPB has found to be illegal and abusive in some cases. This practice might have the effect of preventing students from getting hired and gaining the income they need to afford their debt payments. At some schools, students who miss payments on loans can be kicked off of their meal plans and potentially be removed from classes.”
- Snowballing fees and interest. “In some cases, tuition payment plans may impose hundreds of dollars in fees if a single payment is missed, due to the stacking of late and returned payment fees. The CFPB also found terms in some contracts that allow institutions to convert no-interest payment plans into interest-bearing loans when payments are missed.”
- Borrowers were forced to sign away their legal rights. “Some payment plan contracts and agreements include terms and conditions that appear to waive borrowers’ legal protections, limit how consumers can enforce their rights, or misrepresent the rights or protections available to consumers under existing law. The CFPB found terms and conditions in contracts that included forced arbitration provisions, waivers of the borrowers’ right to seek discharge and retain their own legal counsel, and misrepresentations of borrowers’ legal right to discharge private student loans in bankruptcy.”
- Confusing and inconsistent disclosures. “Unlike private education loans, which are subject to a common set of disclosure requirements, tuition payment plan terms and conditions vary based on the structure of the loan, particularly with regard to the duration of the contract, the number of payments required, and the school’s determination of what disclosures are legally required. This often leads to inconsistency in how these loans are marketed on school websites, making it difficult to find a complete set of terms for the product being offered.”
Ongoing Effort
The CFPB said it will continue to gather and analyze information on tuition payment plans and the practices of school-based lenders, including risks to consumers that may give rise to violations of federal consumer financial law.
The report can be found here: Tuition Payment Plans in Higher Education.
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