Borrowing to pay for your education isn't appealing to everyone – especially when 30-year repayment plans are par for the course. If scholarships don't cover all or part of the bill, most schools offer university payment plans that divide tuition payments into more manageable amounts.

TUTORIAL: Student Loans

How University Payment Plans Works
Payment plans are programs to allow students to pay tuition in installments rather than all at once. Let's say your tuition and fees total $3,500 per semester or $7,000 for the year. You have the option of setting up an annual, semester, or monthly-based payment plan. A monthly plan would divide $7,000 among the number of months you select, based on the options provided by the institution. For example, if you select 10 monthly payments, your payments would be $700 at the beginning of each month. In some situations, your payments could start a couple of months before the fall semester starts or at enrollment. The final payment would conclude before the spring semester ends. Usually, there is no interest charged; instead, an enrollment fee of $25 to $45 is charged on each installment. Before considering university payment plans, start by getting full details on when payments are due, when (and if) interest is charged, if there are any startup charges and if there are late fees.

(For more on scholarships, check out Life Lesson No. 1: Avoid College Scholarship Fraud.)

How Much Emergency Savings Will You Need?
Outside of college, six to eight months is considered an adequate amount of savings. One semester of expenses is the minimum needed if you are planning to get through college without borrowing money.

You can calculate expenses for one semester with a cost of attendance calculator. University websites should provide a cost of attendance calculator or generic college budgeting calculator. A good calculator will estimate total costs to attend school and should include room and board, tuition, books, fees, student health care or wellness fees and transportation. Generic college budget calculators aren't university specific and are especially helpful when you are in the planning stage of where you want to attend school. A bonus to generic college budget calculators is you can include specific expenses you are concerned about, such as spring break and other social expenses. (Before heading off to college, read up on health insurance plans, see What You Need To Know About Student Health Insurance.)

Once you have a number for your expenses, you need to have this amount saved before you reject any federal student loans you are eligible to receive. If you are going to rely on unguaranteed income such as tips or a job you haven't started yet, put aside an extra half-semester of cash reserves.

Use Private Loans as Last Resort
If you reject federal student loans at the beginning of the year, but experience a budget shortfall, you can still borrow private loans. However, you will forgo the fixed-interest rates.

For example, let's say you lost your job midway through the semester and could no longer afford your payments. You borrow a private loan with interest rate terms of prime plus 4%. Your interest rate and future payment schedule could rise or fall with the economy. However, you could have secured a federal student loan at the beginning of the semester that you could have paid back if you didn't have the money. (For more on the difference between federal and private student loans, read College Loans: Private Vs. Federal.)

Alternative and Supplements
Choosing not to use a university payment plan doesn't mean you have to have huge student loan payments after graduation. Try these tips instead of, or in cooperation with, university payment plans.

  • Base your borrowing on future income. Borrowing for education is not a bad idea if you are confident you can pay it back. You can estimate your future income by looking at entry-level positions in your field at certain job-income websites or during an appointment with your career counselor. (For more on estimating student loan affordability, see Student Loans: What Can You Afford To Borrow?)
  • Base second-year borrowing on first-year spending. Don't reject student loans if you don't have enough emergency savings to cover tuition and other expenses. You can always leave this money in an account to accumulate interest throughout your four years. If you never need it, you'll earn back the loan origination fees and then some in interest over the course of a four-year bachelor's degree.
  • If you qualify for subsidized loans, you're out the loan origination fee, but the government pays your interest while you're in school. If you are unsure of how much you'll be able to pay for with a university payment plan, a good option is to exhaust subsidized student loan borrowing first.
  • Reject part of your loan award. If your student-aid report comes back and says you are eligible to borrow $6,000 per semester, you don't have to borrow the full amount. Many creditors are willing to lend more than you can easily afford to repay, so be sure to borrow only as much as you need.
  • Dedicate time for your scholarship search. Scholarships are always a better option than student loans or university payment plans. Whether you are attending college for the first time or you're a graduate student, make an appointment with your high school or college financial aid officer to discuss scholarships.
  • If college bills are hard to handle, look for a cheaper college with similar programs. This isn't always the best option, but it's one you should consider – especially if future income doesn't match well with what you would need to borrow. (For more on whether to choose a cheaper university, read Save On College Budget Busters.)

The Bottom Line
University payment plans are a terrific option for reducing student loan borrowing, but only if you can afford your payments. Tread carefully. Get full details about your university's payment plan options, calculate cost of attendance, have at least a semester in savings before you begin, and borrow federal student loans if your money is tight. You can always begin a university payment plan next year when you know you're ready.