By Jessica Merritt, US News & World Report, featuring Shane Cummings, CFP®, AIF®, Wealth Advisor & Director of Technology/Cybersecurity
While using a credit card to pay tuition may earn rewards, be aware of fees and long-term costs.
In the vast majority of cases, it makes more sense to take out a student loan than to use a credit card to cover your tuition.
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.
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)
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.
