Putting College Tuition on Plastic

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Left; Rob Melnychuk / Corbis: Alan Schein Photography / Corbis

Credit cards. Retirement funds. Home equity. All should be last resorts for families seeking funds to pay for college. But amid the current credit squeeze, a new poll indicates many parents and students are making these less-than-brilliant financial moves to pay for tuition.

The nation's biggest student loan company, Sallie Mae, and polling firm Gallup just released the results of a survey, conducted in May, of 1,400 undergraduates and their parents about how they plan to pay for college this year. One in five parents borrowing money reported either taking out a second mortgage of more than $10,000 or charging some portion of college expenses to a credit card. In a study released earlier this summer, consumer advocate U.S. Public Interest Research Group (PIRG) found roughly a quarter of students reported billing their tuition to a credit card. Such borrowing practices generally carry along with them much higher interest rates and fees than private student loans. "Using a credit card to pay for your education is absolutely the worst financial decision you can make," says debt counselor Catherine Williams of Chicago-based Money Management International.

But many parents and students say they have little choice other than to deplete their savings or grapple with high interest rates down the road. Indeed, among respondents in the Sallie Mae/Gallup poll who said they were using credit cards to pay tuition bills, no parents and only 15% of students said they were doing so because they thought they'd get a better interest rate. Nearly half reported using Visa or MasterCard to finance their education because they had no alternative. Some 3% of survey respondents said they have resorted to withdrawing money early from retirement savings, which can carry up to a 10% penalty fee.

When deciding how to pay for college, families should start by contacting their school's financial aid office. About $130 billion a year is available in scholarships and grants. The first step in borrowing money for school is to max out on low-interest government programs such as federal Stafford loans. In the past, lots of families have turned to private loans to make up the difference, with borrowers taking out about $17 billion in such loans during the 2006-2007 school year. But as credit markets dried up last spring, many private lenders either went out of business or became much stricter about approving loans. And the people least likely to get a bank loan are often the same ones credit card companies are trying to reel in with low interest rates that quickly jump sky-high.

Also of concern from the Sallie Mae/Gallup poll is the finding that some 40% of families didn't factor cost into the decision about which school their undergraduate should attend, which is astounding given the price difference among schools. Tuition at a private, four-year college averages about $24,000 a year, while a good public institution may be as little as $10,000, even for out-of-state enrollees, according to the College Board, the nonprofit that administers the SAT. "We eliminate homes and cars all the time due to price, but then don't go through the same exercise for college," says Tom Joyce, a Sallie Mae spokesman. "That's got to change."

Another troubling finding: some 70% of survey respondents said they didn't consider what a student's potential post-graduate income would be. This is bad news for today's college students, who graduate with an average of some $9,000 in credit card debt, which will cost young wage earners more the longer it takes to pay back. Aggressive on-campus marketing by credit card companies "equates signing up for a new card to impulse shopping," says PIRG spokesman Ed Mierzwinski. "No one tells students that if they don't buy off the balance each month, the price of that pizza they just charged is going to compound steadily." And if the price of a pizza can really add up over time, just think about four years of tuition.