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 Student 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.
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