The Payment Plan
The cost of a college education continues to rise, despite declining consumer ability to pay for it. And with 70 percent of college students and parents agreeing that college is needed now more than ever, according to Sallie Mae’s “How America Pays for College 2012,” finding an affordable institution is key. The College Board’s annual report on “Trends in Pricing” states that the total cost of attending a four-year public university rose 6 percent in-state and, at four-year private universities, costs rose 4.4 percent in the last year. The recent recession, coupled with rising unemployment, has made financing a college education a requirement for most families. Government loans, grants, scholarships, and private loans have become necessities.
To counteract the negative impact of rising educational costs, an increasing number of institutions are offering tuition payment plans that allow families to spread out tuition bills. Instead of having to pay an entire semester’s tuition in full before the first day of classes, families can break that lump sum up into several payments throughout the semester. For a small enrollment fee, students take anywhere from two months to one year, depending on the school, to pay their current academic year’s bill.
While such programs may help make it possible for some students to attend college, and for the institution to generate some income by way of enrollment fees, the downside is that administrators now have added costs and regulatory requirements to contend with. Still, tuition installment plan processes, including the marketing of those plans as an option, can run smoothly. And at many institutions they do.
When tuition payment plans were first introduced, many colleges and universities managed their own, says Betsy Burton-Strunk, senior director of campus solutions at Sallie Mae.
However, schools quickly discovered how labor intensive such programs were. Manually calculating monthly payments and interest for students, updating changes made to schedules and monies owed, and then tracking them created additional work few universities were equipped to handle. Consequently, “the trend over the last 10 years has been to transition away from self-managed tuition payment plans,” says Burton-Strunk.
Marist College (N.Y.), for example, introduced its own10-month tuition payment plan more than 30 years ago, explains Joe Weglarz, executive director of student financial services at the college. Today, the institution relies on Sallie Mae and Tuition Management Systems to manage all aspects of its tuition payment process, which has more than 1,000 families participating (total student enrollment for this year is more than 6,300).
Marist’s approach to its payment plan differs from other schools in that the student gets a credit for the full contracted amount the college expects to receive during the semester, creating a “due from” receivable account from the vendor. This process has been very successful at the college, creating minimal past due student receivables, says Weglarz. The system is designed to automatically generate an exception report if an account becomes delinquent, or when the payment contract is revised.
Marist’s relationship with its payment plan vendors exemplifies the best in turnkey solutions—with Marist enjoying a fully functional electronic tuition payment plan that requires only minimal involvement on their administration’s part. An annual fee covers all the program management and marketing support the college needs from Sallie Mae and Tuition Management Systems.
A lot of universities are heading in the direction of turnkey arrangements, rather than self-management of payment plans, observes Don Smith, vice president of communications at Higher One, which offers the payment plan product CASHNet MyPaymentPlan+.
A recent article from consulting firm Bain & Co., titled “The Financially Sustainable University,” which Smith cites, may help explain the shift. According to Bain, facing budget cuts and an inability to push costs onto students, institutions of higher education are being forced to find ways to operate more efficiently. That means focusing on their core competencies and delegating activities that are not core strengths.
The tuition payment plan in the Lone Star College System may be bridging the gap for students who would not previously been able to attend college, such as if they didn’t qualify for enough financial aid.
For many universities, internally managing a tuition payment plan is quite inefficient, and in an era where doing more with less has become the new mantra, turning over the whole process to specialists makes a lot of sense.
By off-loading the management of tuition installment payments, universities can relieve themselves of the burden of setting up new payment accounts, monitoring timely payments, accepting payments via bank accounts and/or credit cards, collections, answering customer service questions by phone and email, and all related marketing tasks. Third-party providers can manage the entire process, depositing the proceeds of the payments in the university’s bank account every week or month, depending on the contract.
The only downside of a turnkey solution is cost and, to some degree, flexibility. In exchange for assuming near complete responsibility for running a fully functional tuition payment plan for a college or university, providers such as Higher One, Sallie Mae, Tuition Management Systems, Nelnet Business Solutions, and Education Loan Source, Inc., charge a fee. For many universities, however, that cost is less than establishing a fully functional in-house department to manage such activities.
An alternative solution is also available: software. Universities aiming to outsource non-core competencies, but that want or need to reduce the cost of such delegation, can choose to work with a tuition payment plan software solution. Higher One has a software platform for campuses that want to administer their own plans, in addition to its turnkey product, and TouchNet Information Systems is strictly a software provider. Nelnet describes its product as a fully-functional web-based solution.
Harrisburg University of Science and Technology (Pa.) officials chose to go the software route right from the university’s inception of a payment plan program seven years ago, explains Jeremy Walmer, financial accounts manager at the university. Paying for an annual subscription with Higher One, Harrisburg has the technology to offer its students tuition payment options without giving up flexibility regarding how it runs its plan.
Since many of Harrisburg’s students are employer-sponsored adult learners, the university has two types of payment plans:
- standard, which is the option to pay tuition in four installments per semester, or
- deferred, which involves paying the entire tuition bill at the end of the semester when the student is funded by their employer.
Students in the standard plan pay $30 per semester and students deferring payment pay a $50 fee. Using Higher One’s CASHNet product, it takes “less than an hour” to copy over files from the previous semester, says Walmer. Participating students do the rest, enrolling themselves in the tuition payment plan appropriate for their situation.
The time investment is minimal, in part because Higher One’s software integrates seamlessly with Harrisburg University’s ERP system, says Walmer, which allows changes in a student’s status, financial aid package, or course credit load to automatically transfer to the Higher One system.
Allowing students to spread out tuition payments, or to avoid paying money out-of-pocket, has “helped boost enrollment,” says Walmer. “We’re a small school, so we try and go above and beyond for our students.” Offering a tuition payment plan is “definitely a win-win,” he says.
When a school allows students to defer payment of their tuition, even for a month, the school is acting as a creditor and is then bound by Truth in Lending Act (TILA) restrictions and disclosure requirements.
Although only 12 percent of the students in the Lone Star College System (Texas) currently participate in the college’s tuition payment plan, with approximately 80,000 students on six campuses, that number is sizeable. It is also increasing rapidly, in part due to the downturn in the economy.
More importantly, says Diane Novak, associate vice chancellor for accounting, Lone Star appears to be reaching a new population of students. Offering families the option to spread out tuition payments may be making it possible for students to attend college who previously couldn’t, mainly because they either didn’t qualify for enough financial aid or could not afford to pay the entire balance up front. The tuition payment plan may be bridging the gap.
Lone Star began offering a tuition payment plan five years ago, when Texas changed a law that previously required college students to pay their tuition in full before the first day of class. Once students were permitted to spread out their payments, Lone Star turned to TouchNet to implement a financial platform for them.
Students have two months to pay down their debt, incurring a $20 set-up fee to get started. They make a 50 percent down payment and then two additional payments of 25 percent, at the end of months one and two, which is set up as an automated payment linked to a bank account or credit card. In addition to reducing the amount of work required to manage the tuition payment plan, says Novak, automating payments also helps reduce receivables.
Heather Fenton, director of marketing at TouchNet, indicates that delinquencies drop as much as 30 percent to 50 percent at some schools with automated payments. However, because Lone Star accepts payments via credit card, there is a transaction fee that the college absorbs, rather than passing it along to students.
Fortunately, there are a number of ways colleges and universities can generate revenue that covers those fees, and the other costs of installing and managing a tuition payment plan. An enrollment fee, which seems to range between $20-$50 per semester, is one way. Another is late fees. While many schools do not charge interest on tuition payments made over the course of several months, others do, which also helps cover the program’s cost.
Truth in Lending Restrictions
The biggest challenge with these programs is the additional regulatory requirements universities must adhere to once they start extending credit to students in the form of tuition payment options. The Higher Education Opportunity Act (HEOA), through the Truth in Lending Act (TILA), introduced new restrictions and disclosure requirements, effective since 2010, for colleges and universities extending credit to students. Credit is defined as “the right to defer payment of debt or to incur debt and defer its payment,” explains the Sallie Mae report “HEOA: Impact on institutional loans and payment plans.” When a school allows students to defer payment of their tuition, even for a month, the school is acting as a creditor and is then bound by these regulations.
In addition to disclosure regulations, schools are also subject to rules related to retail installment laws, late and insufficient funds laws, and the Uniform Consumer Credit Code once a tuition payment plan is introduced.
At the moment a school extends credit to students, typically by way of tuition payment plans, the additional rules that come into play create additional work and bring with them the threat of significant fines if they are non-compliant. Miscalculating an annual interest rate on a student loan, for example, is considered a violation and subject to a $10,000 fine, explains John Weir, chief operating officer of Education Loan Source. To help schools ensure they are following the letter of the law, Education Loan Source recently introduced its Compliance Manager product.
Staying abreast of these laws and changes to legislation is another reason colleges and universities are opting to turn over management of such payment plans to third-party providers.
But the workload is a big factor, too. Complying with disclosure laws is time consuming and resource intensive. At each step in the tuition payment plan process, paperwork needs to be generated to communicate to the student exactly what participating will cost them. There are four different points in the process when the borrower must receive notification, explains Weir:
- as part of the solicitation,
- when a particular loan or payment plan has been requested,
- when payments have been calculated, and
- when the contract is signed.
In addition to assuming the bulk of the compliance responsibility for college and university clients, tuition payment plan providers manage much of the marketing of the service to students. Tuition Management Systems, for example, provides multifaceted marketing support.
To assist their university clients in alerting potential and current students to the opportunity to pay their tuition bill over several months, Tuition Management Systems uses on-campus posters and brochures and provides inserts for college mailings, as well as direct mail, email, web integration with the university’s site, and inbound phone support. The materials are branded with the college or university’s name and are designed to reach students and their parents a number of times during the college admissions and decision-making process. However, David Pelkey, managing director, operations and technology, says that the critical point is when financial aid notices are sent out to families; that is when information on payment plans is important.
Education Loan Source provides a similar level of marketing support, which is customized to each school’s specific needs, says Weir. The company customizes a web portal for each school, provides email campaigns, brochures, letters, and an outbound telemarketing campaign, as well as inbound telephone support.
While laying responsibility for marketing tuition payment plans at the feet of third-party providers may sound risky, it relieves universities of the burden of promotion and leverages existing marketing materials and processes that plan providers have already developed. In the end, delegating marketing or other payment plan activities is in sync with universities’ goal of focusing solely on their core educational mission.