Colleges pitch payment plans as an alternative to loans, but they could come with high fees, watchdog warns

Though the plans may seem like a “good option,” the report highlights some of the harsh consequences students could face under these plans, Rohit Chopra, the director of the CFPB said in a statement accompanying the report. 

“Colleges and universities should take a hard look at their repayment plans and avoid subjecting borrowers to high fees or coercive debt collection practices,” Chopra said in the statement. 

The report comes amid concerns from the CFPB and others about the steps colleges will take to collect funds owed to them by students and former students. Over the past few years, practices by colleges, including withholding transcripts over an unpaid bill or sending a student to collections have drawn the ire of officials and consumer advocates. These concerns come on top of separate worries about the challenges borrowers can face repaying the $1.7 trillion in traditional federal and private student loans that they used to finance college.

“What you see here is that the CFPB recognizes that most colleges are just financial companies,” Mike Pierce, the executive director of the Student Borrower Protection Center, an advocacy group, said of Thursday’s report on tuition-payment plans. When big banks are accused of charging high fees or pushing consumers towards a risky product, “of course it’s going to draw scrutiny from regulators, the real story here is that this has managed to escape the focus of financial regulators for decades.”  

When schools offer tuition-payment plans, they become lenders, CFPB says

In many cases, schools pitch tuition-payment plans as an alternative to debt because the payments are often interest-free. But in its report, the CFPB makes the case that these plans are a “type of loan.” When colleges offer tuition-payment plans, “they allow students to obtain their education now and pay for it over time; in other words, they become lenders,” officials wrote in the report. 

“We think it can lead to consumer confusion, over extension on debt and other problems when students see this as an alternative to a student loan,” said Julia Barnard, students advisor, Director’s Front Office, at the CFPB. 

Whether the product is a loan has important implications for what schools are required to disclose to students and families. Private educational loans come with disclosures that are required by federal law. According to the CFPB’s report, schools’ disclosures around similar tuition-payment plans can vary significantly. 

Some say explicitly that the plan is not a loan while others describe the enrollment fee as a finance charge, the CFPB found. In other cases, the bureau found that schools stipulate that the tuition-payment plans are educational loans and therefore can’t be discharged in bankruptcy. 

Without consistent information, students and families may not fully understand the cost of the product they’re signing up for or be able to compare the tuition-payment plan with other options for paying for school, the CFPB noted. 

“There are definitely consequences that wouldn’t be possible if a student used a different type of debt financing,” said Charlotte Hancock, program manager at the CFPB’s Office for Students and Young Consumers.

“In the worst case, late payments could lead to disenrollment or eviction during the school term,” she added. 

Adding to the confusion, payment-plan terms are often spread across multiple documents or websites, which can make it challenging for students and families to gather all the information they need to understand the plans, the CFPB found. 

The inconsistent disclosures may also obscure the role that third-party companies play in administering the tuition-payment plans, according to the CFPB. The bureau found more than 60% of schools in their sample offering these plans outsource at least some functions to a third-party. In some cases, the CFPB found that these entities received revenue tied to students’ enrollment and late payment fees. 

Tuition-payment plans often involve fees

Fees are a relatively common feature of the plans, the CFPB found. Roughly 89% of the plans the bureau reviewed charged an enrollment fee and about 80% said they charged a late fee or a returned payment fee. 

The median fee in these plans was $30, but the CFPB found schools charging enrollment fees as high as $200 and fees as high as $300 for a single late payment. The bureau estimated that under some plans in certain circumstances — for example if a student financed a relatively low amount through a payment plan, but paid a high enrollment fee — the annual percentage rate could be up to 237%. 

Students and families should keep an eye out for those high fees in assessing their options for paying tuition, Hancock said. But in many cases, they may have no choice but to pay them because they’re enrolled in a tuition plan without their consent, the CFPB found. 

In a complaint to the Department of Education featured in the report, a student at a large public university said their school enrolled them in a payment plan, even after they were specifically told by school representatives that they wouldn’t be. Due to system issues, the student experienced a delay in receiving their federal financial aid and so it wasn’t available when their bill was due. 

The school signed them up for the payment plan in the meantime and charged them the enrollment fee, the student wrote in the complaint. 

In some cases, as part of signing up for tuition-payment plans, schools forced students to waive their right to participate in class action or other lawsuits related to the plans, instead requiring them to take disputes to arbitration. Similar clauses in other consumer contracts have drawn scrutiny from the CFPB and elsewhere because they can often make it difficult for consumers to get a fair airing of their disputes with financial service providers. 

Regulators watching closely

The CFPB report also highlighted aggressive tactics schools use to pursue students who owe them money, including through tuition-payment plans. 

At at least one college, students who make a late payment to the school could be kicked out of their dorm, have their meal plan suspended and face late fees and interest charged on unpaid balances, the CFPB found. In some cases, schools will send unpaid balances to debt collectors and charge fees to cover collection costs that can be as high as 50% of a student’s unpaid balance, according to the CFPB.

At roughly one third of colleges with a payment plan that the CFPB reviewed, schools will withhold transcripts to collect past due tuition payments. 

Thursday’s report comes out of a dataset and body of work at the CFPB focused on partnerships between colleges and financial institutions. Lawmakers and regulators have been looking closely at these relationships for years in part because a product offered by or through a college, including a tuition-payment plan, can feel to some students as if it has the endorsement of an institution they trust. 

Students often assume that financial products offered through their school are in their best interest and schools review their own practices to ensure that’s the case, Barnard said. 

“Many schools are committed to the financial health and success of their own students, and they should look at the products they are themselves offering to make sure that they’re setting their students up for success,” she said. “Too often, students don’t understand what they’re signing up for and the products are laced with fees that will penalize them and can jeopardize their financial circumstances.”

If schools don’t make changes themselves, they could be at risk of facing consequences from regulators. The CFPB has previously described withholding transcripts in connection with extending credit as “an abusive practice,” under the Consumer Financial Protect Act and told lenders to stop. 

The Department of Education also proposed limiting schools’ ability to use transcript withholding as a debt-collection practice in certain circumstances. The agency will continue to share students’ complaints with the CFPB and state law enforcement officials, a Department spokesperson wrote in an email. 

The Department of Education “shares the CFPB’s concerns about financial products that have unfavorable terms and unexpected fees that can leave vulnerable students deeper in debt and threaten their path toward graduation,” the spokesperson wrote. 

In addition, some states have banned transcript withholding. Despite the prohibition, the data the CFPB’s report is based on indicates that some schools in these states may still be participating in the practice, Pierce said. 

In those cases, “the college is making threats they can’t back up,” he said. “If I were a school business officer I would be really worried about that practice,” because it could draw scrutiny from state regulators and lawmakers.  

Still, he added, “it seems like some of these state laws aren’t worth the paper they’re printed on if schools can go about business as usual.”