Reference no: EM133349247

Case Study: Put It on My Tab: Paying College Tuition by Credit Card-A Wise Move?

Have you ever wondered why credit-card companies are so keen on signing up college students? According to CreditKarma.com, an online credit tracking site, people between the ages of 18 and 29 have the poorest credit ratings of all age groups. In fact, credit-card companies make most of their money from people who don't pay off their balance each month, which is the case with 80 percent of college students. Many parents and students regard credit cards as a convenient way to pay for tuition. However, if you think carrying a balance on a credit card or charging college expenses such as tuition to a credit card is a smart move, consider the following argument, based on mathematics:

Your credit card bill is $1,900. This includes $1,350 for tuition and fees at your community college and $550 for books for two semesters. Being frugal, you decide not to use your credit card again, since you don't want to get too far into debt. The minimum monthly payment due on your balance is 4 percent, which comes to $75 the first month. You pay the minimum due faithfully each month.
At this rate, how long will it take you to pay off your first-year college expenses? If the annual percentage rate on your card is 17.999 percent, it will take you 7 years to pay off that balance on your credit card!* In addition to the principal (the amount you charged to the card), you'll have paid a total of $924.29 in interest. This means that the amount of money you actually paid for your first year of college expenses was $2,824!**

What if you had taken out a student loan instead? The annual interest rate on a federal student loan is about 8 percent. If you put $75 a month toward paying off your student loan, it would take you 2 years and 4 months to pay off the loan. Furthermore, you don't have to start paying off your student loan until you graduate. By taking out a student loan to cover your college expenses instead of charging them to a credit card, you wouldn't have to pay anything for the 2 years while you are in college. Even then you would pay off the loan almost 3 years before you would pay off your credit card-and the total interest would come to only $188. In other words, you paid $736 for the "convenience" of charging your tuition, fees, and books for your first year at community college. Multiply this times 2 or even 4 years, and you could be paying out several thousand dollars just in interest simply because you didn't apply your logic and your critical-thinking skills when deciding how to pay for your college expenses. (Taken from eText Ch.8)

Questions: Post your responses to the following questions:

1. Several colleges, including Tufts University, Boston College, Sarah Lawrence College, and Arizona State University, have discontinued credit-card payments for tuition. In part this is because the credit-card companies charge the college a 1 percent to 2 percent fee on each charge, which ultimately gets added on to the cost of tuition. What is the policy at your college or university? Do you agree with the policy? Construct an argument supporting your answer.

2. Examine your own credit-card use. Discuss ways in which you can use deductive logic to be more economical in your spending habits.