Pay As You Go?

It's "hot dogs and beans" time at the Karle household in Wilton, Conn. That's because Madreen Karle, a schoolteacher and mother of four--two of whom attend pricey private universities--is determined to buck national trends by paying for college without resorting to student loans.

But with the cost of sending Meeghan to Notre Dame and Christen to Holy Cross a whopping $54,000 annually, even Madreen and husband Thomas--who have devoted Madreen's entire paycheck to the college bills--couldn't hope to pay the tab in one lump sum. Their answer: a monthly payment plan.

Although it appears that no one has statistics, industry experts maintain that an increasing number of families of U.S. students are doing likewise, partly because colleges are making such plans more widely available.

"When the [higher education] industry was fat and sassy and there was no shortage of students, there were no incentives to do this," says Larry Goldstein, vice president for finance and management programs for the National Assn. of College and University Business Officers in Washington. "But now there is a great deal more competition between colleges for students, so they are trying to make it as easy as possible for parents to budget the rapidly rising cost of an education."

For parents who haven't saved a bundle but do have the ability to pay at least a portion of college expenses throughout the year, these plans can be highly cost-effective.

Here's how they work: Once a college or university accepts a student, it sends out a notice outlining the tuition and fees required for the year. If the student has applied for financial aid, he or she will receive a package of information on grants, scholarships and loans that can help defray the costs. The amount left after direct financial aid--grants and scholarships--is deducted and is what the family is expected to pay. Traditionally, families would pay that amount either in a lump sum or finance it with a student loan.

With the pay-as-you-go option, the family's financial obligation is divided by the number of months in a semester, quarter or school year at the institution. The parents or student then pays the fees in equal monthly installments.

The college usually contracts with an outside firm to collect the payments. These firms don't charge interest, but they often impose a setup or administration fee. The fees vary from school to school but usually range from $25 to $125 per year. (A few schools that handle collection of the monthly payments themselves may charge interest, but that's rare, Goldstein says.)

In dollars and cents, that means the person paying the college bills saves a fortune on financing, says William Hastings, president and chief executive of Academic Management Services, a Swansea, Mass.-based company that contracts with about 1,500 colleges and universities to administer monthly payment plans.

Consider a student with a $5,000 financial obligation. If this student takes out an unsubsidized student loan, the $5,000 debt will accrue interest while he is still in college. When he graduates four years later, the debt will have grown to nearly $6,950, assuming an 8.25% loan rate. If he then opts to pay the loan off over 10 years, he'll pay a total of $10,225--double his initial cost.

However, if he or his parents can pay $500 a month, the total cost would amount to $5,050 with AMS, Hastings says.

Other tuition payment services, such as Tuition Management Systems in Newport, R.I., which works with about 700 schools, and Wilmington, Del.-based Student Finance Corp., operate similar monthly payment programs. But individual colleges often call the shots on how long a tuition bill can be stretched out. Generally speaking, students (or parents) are expected to pay the entire bill within a year. And sometimes the programs require them to start payments before school starts.

Many families that use payment plans also take out student loans, Hastings says. But, by and large, they borrow half as much as the families that don't use payment plans, he says.

Experts acknowledge that whether a tuition installment plan is feasible for a given family hinges largely on the amount of tuition that must be financed and how willing the college is to be flexible. But the plans are certainly worth considering, they say. And nearly every major college in the country now offers such a program, according to Jack Joyce, a spokesman for the College Board, a New York-based college research firm.

In fact, the College Board's 1998 "College Costs and Financial Aid Handbook" includes seven pages of tiny type listing the colleges that offer installment payment plans for tuition. These include USC, Stanford, Pepperdine, Harvard, Radcliffe, Columbia, Yale and Princeton universities, plus scores of state colleges and universities. Even community colleges, which may be financing hundreds, rather than thousands, of dollars in tuition costs often offer installment plans.

If your financial aid counselor hasn't already mentioned a monthly payment plan, Joyce says, ask about whether one can be arranged.