Loyola University Chicago School of Law, JD 2025
College is typically the first instance in which many Americans encounter debt collection, lending, and credit reporting. The most common way that students borrow is by acquiring student loans, either from the U.S. Department of Education or from private financial institutions. A less used financial product is the tuition payment plan, which is offered by many colleges in which students pay for postsecondary education in installments. A tuition payment plan is a “buy now, pay later” product, generally marketed as an alternative to loans. However, many tuition payment plans need to be understood as a type of loan, rather than an alternative to loans.
A new report released by the Consumer Financial Protection Bureau (CFPB) included reviews of tuition payment plans and related contracts listed on 450 different universities’ websites, an analysis of consumer complaints, and interviews with current consumers. As a result, the CFPB found that nearly every college offers some type of tuition payment plan, often accompanied by “inconsistent” disclosures, automatic enrollment and forced use, and high missed or late payment fees. Further, CFPB’s research revealed that at least 33% of universities reserve the right to withhold transcripts from students with an unpaid balance as a form of debt collection practice.
Among the estimated 3.9 million students that use a tuition payment plan option, over 60% of those students are not getting this “plan” through their school, but rather through a third-party financial service provider such as Nelnet, Transact, and Touchnet. While these third-party providers are not always disclosed to students, they provide software which embeds the tuition payment plan processing functionality into “student portals” as well as payment processing services through their partner banks, such as Wells Fargo. These third-party providers also act on behalf of the university in fulfilling certain compliance responsibilities.
Notably, the CFPB observed that third-party service providers receive fee revenue from enrollment fees, late and returned payment fees, and transaction fees. The Truth in Lending Act (TILA) prohibits private student loan lenders from directly or indirectly offering or providing any gift to a school in exchange for any advantage or consideration provided to the lender related to its private student loan activities and from engaging in revenue sharing with a school. These federal regulations are critical in order for colleges to continue to be trusted sources for their students; however, some tuition payment plans may currently fall outside the scope of such regulations. Other than being federally regulated, state law also impacts a university’s disclosure obligations. The CFPB notes that some states are considering regulations which would explicitly provide that education financing products, such as tuition payment plan installment contract qualify as private student loans.
Inconsistent Disclosures and Waivers of Consumer Rights.
When schools use a variety of terms and practices, they can confuse consumers about the financial contract they are being bound by. Such inconsistent disclosures include marketing the tuition payment plan as a “buy now, pay later” option while scattering information about fee levels and terms throughout different documents or webpages. Practices like such could compromise the integrity of the tuition payment plan offered by the university and/or third-party provider. For instance, tuition payment plans are generally marketed as an alternative to loans, they are in fact private student loans under the Truth in Lending Act (TILA), and universities offering such a plan could be considered creditors, and under Regulation Z, be subject to the regulation’s general advertising, disclosure, and timing requirements that apply to closed-end credit. Inconsistencies and overlaps in terminology can confuse students, and even possibly binding them to a financial product that they did not believe they signed up for, subject to various interest and fees. Schools that have Payment Plans allowing payments after the tuition due date which impose any “finance charges” (any fees, interest, amounts required tuition insurance, etc.) are subject to TILA reporting requirements. CFPB found that only some schools provide TILA disclosures, and those disclosures widely vary across universities. Additionally, the inconsistencies in definitions and disclosures make it difficult for students to understand the true cost of credit in the payment plan, when comparing financing options for their education, which is a violation of Regulation Z.
Included in these inconsistent disclosures are confusing terms and conditions are waivers of a consumer’s right to legal protections or even misrepresent those rights or protections available to consumers under the existing law. The National Association of College and University Business Officers, known as the leading source of information for campus finances, published that “best practices” for student financial agreements included clauses related to transcript withholding, class action waivers, waivers of infancy defense, and mandatory arbitration.
Hidden Fees and Coercive Practices.
Another risk of tuition payment plans is that borrowers can become enrolled without their knowledge or consent, due to financial delays or withdrawal from classes. By automatically enrolling students due to something out of their control harms students by adding an additional, unnecessary fee to the cost of attendance or by compelling out-of-pocket payments during the school year. Moreover, automatic enrollments disproportionately impact low-income students who are given no other option but to withdraw from school.
When analyzing late fees, the CFPB discovered that nearly 90% of the tuition payment plans average $37 for enrollment fees. Further, 60% charge a $29 returned payment fee per instance and 44% have late fees averaging $46 per late payment. In some cases, late penalties may put student borrowers in a situation where they end up owing more than they borrowed for a financial product marketed as being “no-cost”. At least one in three of the universities reviewed by the CFPB withhold transcripts from student borrowers behind on payments, “a potentially illegal practice” that can have severe consequences for students trying to begin their careers or finish their education.” Several universities using coercive debt practices have also reserved the right to cancel meal plans and/or remove borrowers from student housing for late payments. Public schools have resorted to having state income tax refunds intercepted to offset overdue balances as a debt collection practice. For example, Ohio’s state law requires public colleges to send overdue accounts to the state for collection. Lastly, the terms and conditions listed in contracts related to the financial obligations of student borrowers include waivers of a consumer’s right to legal protection or even misrepresent those rights or protections available to consumers under the existing law.
The path forward involves universities reevaluating the structure of their tuition payment plans considering the warning issued about such plans deceiving and taking advantage of borrowers. Legislators should focus on creating regulations more geared toward these tuition payment plans, such as mandating TILA disclosures in any kind of payment plan to ensure that the institutions and third-party providers are not engaging in deceptive practices to benefit themselves. Moreover, students and parents need to make sure that they have a clear and concise understanding of what type of financial product they are signing up for and if it is in fact the best fit for them. Students have the right to be protected against inaccurate and unfair financial practices that universities are engaged in. By addressing all of the risks that have been found, and creating proper regulations surrounding those risks, we can ensure that students will feel comfortable and protected with what may be their first experience with receiving any kind of loan, and institutions can be held to the high standard of care they owe to their students and parents.