The Consumer Financial Protection Bureau (CFPB) recently issued a new report finding that students face risk when entering into agreements with colleges to spread the upfront cost of tuition into several, interest-free loan payments. 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 report also finds that 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.
“Tuition payment plans offered by schools may look like a good option, but this report shows student borrowers can end up paying high fees, be forced to sign away their legal rights, or even have their transcript withheld by their school,” said CFPB Director Rohit Chopra. “Colleges and universities should take a hard look at their repayment plans and avoid subjecting borrowers to high fees or coercive debt collection practices.”
The report, Tuition Payment Plans in Higher Education, finds that 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. Nearly 4 million students each term are in some form of tuition payment plan arrangement with their school. The CFPB’s report finds that 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.
The report looked at public information on tuition payment plans from nearly 450 institutions’ websites. According to the data reviewed by the CFPB, 87 percent of the institutions in the sample offer tuition payment plans directly to students, with 60 percent of those institutions offering payment plans outsourcing some repayment functions to third-party financial service providers.
Even though these tuition payment plans are typically interest-free, students often encounter tacked-on fees. The report found:
- 89 percent of schools in the report’s sample charge an enrollment or set-up fee, averaging $37 and as high as $250;
- 60 percent 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; and
- 44 percent 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.
These fees, when added on to the cost of the tuition balance, can create a high cost of credit. 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 percent.
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 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.
The CFPB 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.
Read the report, Tuition Payment Plans in Higher Education.