As families face the high cost of college tuition, some may consider using a credit card. It can be a creative solution, offering the potential for cash back, travel rewards and 0% introductory annual percentage rates that can turn a large expense into perks or offer interest savings.
However, there are significant risks and few situations when it makes sense. Transaction fees, high interest rates and the danger of accumulating long-term debt should weigh heavily on your mind if you’re considering paying tuition with a credit card.
Consider the advantages and drawbacks of paying with a credit card — both the short-term perks and long-term risks — especially if you can’t pay off the balance immediately.
[Read: Best Private Student Loans.]
Possible Benefits
Using a rewards credit card can help you get something back from your tuition purchase in addition to education. The rewards can add up quickly when considering a large expense. For example, if you’re paying a $5,000 tuition bill, you can get $100 back using a card that earns 2% cash back.
Credit cards with the best sign-up bonuses may offer hundreds in value when you meet minimum spending requirements, which can be easy to do when you pay a large bill such as tuition. You might earn a large enough sign-up bonus to fly your student home for the holidays.
Another consideration is the potential for interest savings with 0% cards, which offer a 0% introductory APR on purchases, usually between 12 to 18 months but as long as 21 months. You could use a 0% card to stretch tuition payments over time without paying interest, which can offer savings compared with student loan interest. You just need to pay the balance in full before the introductory rate period expires.
Let’s say you charge a $5,000 tuition bill to the Wells Fargo Reflect Card, which has a 0% introductory APR on purchases for the first 21 months (18.24%, 24.74% or 29.99% variable APR thereafter). If you pay about $238 per month for 21 months, you’ll have the balance paid in full and won’t have to pay any interest charges. (See Rates & Fees)
[Read: Best 0% APR Credit Cards.]
Potential Drawbacks
Don’t get too wrapped up in the benefits before considering what it might cost. You’ll most likely pay a transaction fee when you pay for tuition, and carrying debt can be costly if you can’t pay your balance quickly.
The first question you should ask about paying tuition with a credit card is whether it’s allowed. Many schools accept credit cards, but you shouldn’t count on paying via card unless you’ve confirmed it’s an option.
Schools that accept credit card payments typically charge a fee between 2% and 3%. If you’re already paying a hefty bill, you might not be thrilled about adding a fee. On a $5,000 tuition bill, a 2% to 3% fee is $100 to $150.
If you plan to earn rewards with a credit card, understand that the transaction fee can easily cost more than the rewards you earn. Unless you find a credit card that earns 3% or more on tuition, you probably won’t come out ahead. An exception would be knocking out a large sign-up bonus worth more than your transaction fee.
Another concern is whether you can afford to pay your credit card bill. If you carry a credit card balance subject to interest, you’ll pay monthly interest charges.
“The large expense of tuition significantly increases the likelihood students or families will carry a credit card balance over longer periods of time, which is why student loans are specifically designed to have lower interest rates and longer repayment periods,” says Scott Patterson, president and CEO of CU Student Choice, a national consortium of nearly 300 not-for-profit credit unions that help families and students finance higher education expenses. “A high credit card balance with a higher interest rate compounds much more quickly, creating a debt cycle that can be much harder for the student or parent to escape.”
Let’s say you use a credit card with a 19% interest rate to pay a $5,000 tuition bill. If you make a minimum payment each month, it will take you almost 23 years to pay it off, and you’ll pay $7,323 in interest charges on top of the original $5,000 charge.
“Given the way interest compounds when carried forward, this could dramatically increase your total student debt costs and make it hard to keep pace with interest being accrued,” says Shane Cummings, certified financial planner and wealth advisor at Halbert Hargrove.
If you’re considering credit cards as an alternative to student loans, do so cautiously. Federal student loans offer income-based repayment plans, low interest rates and protections you won’t get from a credit card.
Patterson cautions students unable to quickly pay off accumulated credit card debt. Serious risks can include higher credit utilization, resulting in lower credit scores and higher interest rates, which can influence how much you pay to finance cars and other loans. “It can even impact a person’s ability to qualify for a mortgage in the future,” he says.
“A student loan will be most advantageous when you or your family don’t have the resources to pay student debt or related costs in full each month and need to borrow long term,” says Cummings. “Student loan rates will normally be lower than credit card interest rates.”
[Read: Best Sign-up Bonus Credit Cards.]
When It Makes Sense
There are a few scenarios when paying tuition with a credit card makes sense, such as:
— If you have a 0% introductory APR and can pay off the balance before the standard interest rate kicks in.
— If you can collect a large sign-up bonus and the bonus is larger than the transaction fee the school will charge for using a credit card to pay.
“If parents and students are considering using a credit card to pay tuition because it is convenient, they should consider the significant long-term impacts,” says Patterson. “Getting stuck in the credit card debt trap is a high cost for convenience relative to the time it takes to apply for a student loan.”
Alternatives to Using a Credit Card for Tuition
The situations where paying tuition with a credit card makes sense are limited, and more traditional payment methods such as student loans and school payment plans can be more reliable options.
— Federal student loans. If you’re planning to make payments on tuition for more than two years, federal student loans are the way to go. You can get lower interest rates with student loans than credit cards and most other loan products. Additionally, federal student loans offer flexible repayment options, such as income-driven repayment plans, and may offer loan forgiveness programs.
— School payment plans. Schools may offer tuition payment plans that spread the cost of tuition over a semester or term. Instead of a single payment, you can make two to four installments. These payment plans may be interest free but typically charge enrollment, late and returned payment fees.
— Private student loans. If you’ve maxed out your federal student loan limits, private student loans might still be preferable to paying with a credit card. While it doesn’t have the perks and protections of a student loan funded by the federal government, a private student loan will likely still offer a lower interest rate than any credit card.
“Overall, student loans are the safer, more structured option for financing tuition since credit cards come with higher risks and costs,” says Leslie H. Tayne, a New York financial attorney at Tayne Law Group. “And student loans don’t have to be paid right away, unlike credit cards, when the bill comes in less than 30 days.”
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Should You Pay Tuition With a Credit Card? originally appeared on usnews.com
