Choosing the Right Payment Option
Once scholarships and financial aid have been awarded, families look at how to pay the tuition balance. For families interested in spreading tuition over a few months, some schools offer billing plans, which typically require payment in ten months or less. Billing plans do not charge interest; however there is usually a fee, which is important to consider in the total cost of financing. Some schools require tuition insurance, which can add one to two percent to the balance owed when using a billing option.
Tuition loans are becoming more popular as tuition costs rise and families have more than one student in school. There are a number of loan options to choose from including home equity lines, credit cards, installment loans and specialized education loans. Parents should check to see if their school offers a cash discount for tuition payment in full. Loan programs typically qualify for these discounts, which may offset a significant portion of the interest on a loan making it an attractive option.
Home equity lines
One option for many families is a home equity line of credit. The major advantage is the potential tax deductibility of the interest paid. This is a good option for some families; however, it is not the answer for everyone. In some cases, home equity may be targeted for college expenses or retirement savings. There may not be enough home equity available to borrow against. The process for obtaining a home equity loan is significantly more complex than other types of loans; however, once it is in place the home equity line can be drawn upon easily. Home equity lines typically have variable rates, and there may be fees charged if the line is not used.
Credit cards may be an option, although they are generally a poor way to finance a significant expense like tuition, because interest rates tend to be higher than on other loan options. Interest rates on credit cards are usually variable. Low initial rates or "teaser" rates are frequently offered, but usually for limited time periods.
Many schools do not accept credit card payments, so a cash advance may be required to make the payment. Often there are different rates and fees applied to cash advances, so always read the fine print. If payments are delinquent, there are often late fees or higher "penalty" interest rates which can add up quickly. It is important to understand them before putting a large balance on a credit card.
The important terms and conditions for any credit card can be found in a chart, typically on the back of the offer or statement called a "Shumer box." Always look for this chart and review it carefully. Finally, the repayment schedule or minimum payment due for credit cards is usually about three percent of the outstanding balance. If only the minimum amount is paid, the balance will be paid down very slowly and interest expenses will be very high, even if the quoted rate is low.
Installment loans can be a more attractive than credit cards. General-purpose installment loans, often called "personal loans" or "signature loans," can be obtained at any bank and typically carry interest rates around 12 percent for the best credit quality borrowers. Average interest rates for these loans can be checked at www.bankrate.com. Lower interest rates can be found for a special type of installment loan called a single purpose loan, similar to an automobile loan. Some companies specialize in single purpose educational loans that offer single digit interest rates.
Low interest educational loans
There are two types of private educational loans (sometimes called alternative loans). One format is designed like a mortgage, with variable interest rates, origination fees, and relatively long terms up to twenty years. These loans are designed primarily for financing college tuitions. The long terms mean that monthly payments are low, enabling students to pay them back slowly once they are out of school. Due to the long terms and the origination charge (an upfront fee that is typically five to six percent of the amount borrowed), the total interest expense for these variable rate loans can be as much as 50 percent higher than a fixed rate installment loan.
The second type of education loan is designed like an automobile loan, with fixed rates, no fees, and relatively short terms. These loans for parents are designed exclusively for financing private K-12 education and can be used at any accredited school. The repayment schedule is set up so that the loan is paid down completely in a fixed period of time, usually 12 to 60 months. There are typically no fees or prepayment penalties, so paying these loans off early can reduce the total interest expense making them ideal for families juggling cash flow. Tuition balances for subsequent years can be easily rolled into the existing loan so there is only one monthly payment. For more information on these fixed rate loans for private K-12 education visit www.yourtuitionsolution.com.
While there are many loan options available, it pays to do some homework. Home equity lines or specialized fixed rate education loans are usually your best options for financing secondary school tuitions.