So this is counter intuitive but stick with me…use at least some credit cards to pay for college tuition. I want to start out first with why you shouldn’t do this, but again, please stick with me cause I have the solution.
- Credit card interest rates are very high. Credit cards are unsecured debt so of course they are going to charge higher interest rates. Here is a card with a 18% interest rate used to pay for one year of college costing 30,000. If you let the debt sit on the credit card, you will end up paying 5,400 in interest the first year, $6,372.00 the second year and so one.
- Many colleges are charging an average 2.62% fee when paying with a credit card. This means if you have 30,000 in tuition you are paying a fee of $786 extra, not including the interest mentioned above.
So why is it a good idea?
Two things federal student loans and credit card signup bonuses. If you have the money to pay off college already, then you can increase your buying power of your cash. Further you are going to pay with federal loans then you can lower or even beat the interest rate. The following explanations and illustrations are very technical, so please ask questions in the comments.
Understanding Accrual Of Federal Loans.
There are two main types of federal loans, the direct subsidized loan and the unsubsidized loan. First off, subsidized means that interest on the loan will not begin accruing until a set date when after ending attendance of school usually 6 months(usually only for undergrad), and unsubsidized loans start accruing debt as soon as they are paid(usually for Grad school). Here is the link to the interest rates: https://studentaid.ed.gov/sa/types/loans/interest-rates#rates
Opposed to Credit card rates, federal loans have a much lower rate of interest, 5.05% to 7.6%. So for undergraduate degrees, subsidized loans, you start paying interest of 5.05% after school ends. Lets make a chart where the cost of tuition is $10,000 a year, like most in-state state college tuition. 4 year college, no payments for 10 years and 1.069% origination fee are assumed.
| Cost of tuition Annual | $10,000.00 | |||
| Undergraduate rate | 5.05% | |||
| Graduate rate | 6.6% | |||
| Grad Plus | 7.6% | |||
| Origination fee | 1.069% | $106.90 | ||
| Undergrad subsized | Undergrad unsubized | Grad unsubsidized | Grad Plus | |
| Principal | ||||
| College YR 1 | $10,106.90 | $10,106.90 | $10,106.90 | $10,106.90 |
| College Yr 2 | $20,213.80 | $20,724.20 | $20,880.86 | $20,981.92 |
| College YR 3 | $30,320.70 | $31,877.67 | $32,365.89 | $32,683.45 |
| College YR 4 | $40,427.60 | $43,594.39 | $44,608.94 | $45,274.29 |
| Year 1 | $42,469.19 | $45,795.91 | $47,553.13 | $48,715.14 |
| Year 2 | $44,613.89 | $48,108.60 | $50,691.64 | $52,417.49 |
| Year 3 | $46,866.89 | $50,538.09 | $54,037.29 | $56,401.22 |
| Year 4 | $49,233.67 | $53,090.26 | $57,603.75 | $60,687.71 |
| Year 5 | $51,719.97 | $55,771.32 | $61,405.59 | $65,299.98 |
| Year 6 | $54,331.83 | $58,587.77 | $65,458.36 | $70,262.78 |
| Year 7 | $57,075.58 | $61,546.45 | $69,778.61 | $75,602.75 |
| Year 8 | $59,957.90 | $64,654.55 | $74,384.00 | $81,348.56 |
| Year 9 | $62,985.77 | $67,919.60 | $79,293.35 | $87,531.05 |
| Year 10 | $66,166.56 | $71,349.54 | $84,526.71 | $94,183.41 |
Therefore, the best fed loan to get is the subsidized loan, and worst fed loan to get is the Grad Plus. For our purposes use the subsidized loan calculations.
Using Credit Card Sign Up Bonuses.
Ok, if you haven’t read How to use your credit score to make money they I highly suggest you do this now. Here is a break down of the key points: Treat credit card bonuses as returns on investment(ROI) instead of cash back AND Put that ROI into a percentage. A quick example would be when you see a credit card commercial on a banner that says “$200 cash back when you spend $1000 in three months,” think “I have things that I have to buy (like TP) and it will total $1000.00, so this means I will make a 20% ROI on money I already had to spend.”
Alright, you see where I am going with this…but you think, “how many credit cards really offer this deal cause I’m gonna be spending 10 grand a year.” Go to THE LIST to look at all of your options. With good credit it is possible to get at least some ROI. Even if you only get 10% back…that’s gas for a year, or a months rent.
Here are the hints, because you are going to have to have a lot of credit cards and there is this little thing called the 5/24 rule. Meaning a lot of credit card companies will not approve an application for a new card if you have opened 5 cards in the last 24 months(2 Yrs). This is only per person, so a spouse or child over 18, or grandparent may be able to also open 5 cards. Read How to properly open and close credit cards to learn all the tricks.
In Conclusion
How much money can I save? You and your spouse are paying for your kid to go to college. Even if you have the cash, pull out the highest amount of fed subsidized loan as possible, for our purposes lets say that is $10,000. Then, you and your spouse both get the Capital one savor card, and you get the Chase Sapphire card. The savor card gives a $500 bonus when you spend $3000, and the chase sapphire card give a $500-$700 bonus (depending on how you redeem the points) when you spend $4,000. Next, you split tuition between the three cards thus hitting all the bonuses, then you pay the cards with the loan. Consequently, you just made $1,500 by spending $10,000 or a 15% ROI, and the best part is you didn’t spend any of your own money until your child is done with college
