10 Ways to Avoid Students Defaulting on Payment Plans

By Sean Steinmarc, TFC Tuition Financing

#1: Set expectations

It is important to set the tone for what is expected of your students right away when they first enroll. Make sure to set expectations regarding what they will experience with their education as well as what is expected of them with their payment plan. Students often review a great deal of paperwork when they enroll, and there is a reasonable chance that they might sign forms after a cursory skim without fully taking the time to comprehend every detail. Of course, your staff will review everything in detail to make sure the student understands; however, there is a definite advantage to going back through a second time and making sure that students understand explicitly that they are responsible for their payments. Don’t forget to stress the date that payments start – oftentimes we hear from students that they thought payments didn’t start until after graduation. In these cases, it is apparent to us that they were confused about the difference between their payment plan and their Title IV loan. If students have multiple loans, make sure that they understand each separate responsibility, including the dates and amounts of payments due.

#2: Ensure the student is committed to your school and their education

I always recommend getting some form of down payment from students before their payment plans begin. If they are unable to offer a down payment that is at least equal to the amount of their monthly payment, then there is little chance that they will be able to afford their payments the following month. This also starts the students with a financial commitment right away, which reinforces the psychology of their commitment to paying their payment plans, as well as to your school.

#3: Enroll the right students

While financing constraints should never be the cause of a student not enrolling in your school, there are plenty of other reasons that a student shouldn’t enroll. Let’s face it – not everyone belongs in your school. I wholeheartedly believe that every potential student deserves an education; the goal is to make sure that students are paired up with the right educational institutions. When students enroll in courses for which they do not have a personal passion, they are less likely to follow through on their commitment, and thus more likely to default. We all know that there are students who don’t belong in our schools – don’t focus on filling seats with any student; focus on filling them with the right students.

#4: Get co-buyers

Do your students have outside supporters, such as family members, who might be willing to guarantee their education?

We have found, through our internal data analysis, that students without co-buyers are 2-3 times more likely to default than those with co-buyers.

Parents, guardians, grandparents, spouses, partners, or other supporters who want to see your students succeed might be willing to sign on as co-buyers to their payment plan agreements. Oftentimes simply contacting co-buyers if students fall behind is enough to kick the students into gear to get up to date on their payments. Plus, if the students do not live up to their responsibilities, you can follow-up with the co-buyers for payment.

#5: Ask for as many contact points as possible when students first enroll

You will find the most success with students for whom you have multiple points of contact. If students initially provide just one phone number, perhaps their cell phone, ask for a home phone or a work number in case there’s a problem with the main number. Then call all numbers and make sure that they work. Students are excited to enroll, and this is the perfect time to ensure that you will be able to communicate with them for any issues that could come up in the future, including potential payment issues. And, if collecting a mobile number, be sure to get your students’ permission to text them – often, students will respond to a text more readily than a phone call.

Also, be sure to collect working email addresses for students that they check regularly for important school information.

#6: Set affordable payments

Whenever I interact with a new school (or an established school that is simply new to me), I always ask about their in-house payment plans. Many schools will take the easiest approach – students have a gap of x dollars, and the program is y months long, so their monthly payments are simply x divided by y. Not a fan of algebra? For simplicity, let’s say that a student needs to finance $10,000, and the program is 10 months long. $10,000 (x) divided by 10 months (y) equals a monthly payment of $1,000. If we take a step back and think about these students who have no other resources to pay in full, and no ability to take out further loans for their education, we can all understand that it’s not surprising that students fall behind on their payments. A monthly payment of $1,000 simply isn’t affordable.

When setting up payment plans with students, it is incredibly important to have conversations with them about what they can actually afford to pay with the resources they have available to them. Discuss how they will pay for their education – are they working? Do they have family support? Savings? This simple conversation will go a long way toward preventing defaults. And keep in mind, a student making a $300 per month payment on time for a year is better than a student making the first $1,000 payment then defaulting after two months.

#7: Provide financial literacy resources

I continually hear stories from school owners and directors about students who claim to be unable to afford their monthly payments, only to arrive at school with a brand-new cell phone or a new car. Many of our students are still young and haven’t had the benefit of any long-term financial literacy education. It falls on us all to counsel students on the importance of managing their finances properly. There are a variety of financial literacy courses available to schools – some basic free courses, and some for a fee. Whichever direction you go, having ANY financial literacy course will improve both on-time payments from your students as well as their future success and school satisfaction. As a bonus for schools receiving Title IV funds, a financial literacy course at your school is likely to lower default rates as well.

#8: Make it easy to make payments!

This one may seem obvious at first glance: remove any and all barriers to students making their payments.

Staff appropriately, especially if you have a small staff. If students want to make payments, they shouldn’t have to wait until the one person responsible for collecting payments comes back from vacation.

The longer that tuition money stays in a student’s pocket, the greater the chance of an impromptu shopping spree (despite your best efforts with the aforementioned financial responsibility courses).

Do you offer automated payment options? If you do not, then at least take this one concept away from this article: please, please, please implement automated payments for your students. Whether deducted from a bank account, credit card, debit card, or as a payroll deduction, automated payments will have a phenomenal impact on your tuition payment performance. Students will not have to remember to make the payments each month, you will not have to chase them down to make payments, and human error and emotion will be substantially reduced.

Your initial instinct may be to not allow credit card (or debit card) payments to avoid losing a percentage of those payments to credit card fees. My advice: never turn away money. Allowing card payments removes a potential barrier – you are much better off paying a few percentage points to a credit card processor and getting the rest of the payment, then risking the chance of students falling behind and eventually defaulting.

#9: Consistent (not constant) follow-up

Adhering to a consistent follow-up plan will help drive increased payments from your students. Note that consistent does not mean constant – your students need room to breathe, and constantly bombarding them will simply drive them away. Start with a plan – set a timeline for how often you will follow up with students at every stage (10 days late, 14 days late, etc.), and stick to that plan.

Vary your communication methods, including the messages themselves. If you’re using paper letters, change the color or layout of your envelopes so that students see a progression and difference. If using email, change subject lines in the same manner. These slight changes will increase communication open rates, which lead to increased realization of their responsibilities, and thus payments.

Make sure you have a process in place to track and follow-up on promises to pay. Don’t wait until students are late – friendly reminders five days before their due dates will go a long way towards supporting on-time payments. Keep in mind that all student-staff interactions are reflections of your school.

There is inherently negative sentiment around collecting money from your students, so make sure that all members of your staff recognize the importance of keeping positive rapport with students, even if students are falling behind on payments.

#10: Choose the right partners

When establishing and maintaining an in-house payment plan, many schools will partner with third-party vendors to assist with everything from origination to payment collections. As with all aspects of your school, it is incredibly important to research and review potential partners and be sure to ask many questions.

Origination/payment plan software

You might not think that the initial paperwork is as important as follow-up work done by your school or third-party servicer. That is, until you get hit with students refusing to pay because the agreements that they signed were confusing, or worse yet, a lawsuit or scrutiny from your state’s attorney general for non-compliant payment plan contracts. You want to ensure compliance with federal Truth-In-Lending guidelines and state installment contract laws. If you are concerned with your compliance with Truth-in-Lending requirements, I highly recommend that you consult an attorney familiar with our sector for further discussion.

Any software that you are using should also be able to handle proper amortization of interest (if you are charging interest). It is important to make sure that these fundamental calculations are compliant with applicable laws as well.

Customer service/follow-up

If partnering with a company to receive payments and follow-up with past due students, find out what communication methods they use and how often. Millennials in particular are less likely to respond to phone calls or regular letters, so text message and email communications are important. Students will need reminders sometimes about their payments coming due. As noted earlier, if there isn’t sufficient communication being received by your students about their accounts, or if that communication is limited to letters or robo-calls (automatic messages left on voicemail rather than a live counselor), then students will miss payments and default.

You also want to make sure that the counselors calling your students are treating them respectfully. Counseling students on the importance of their credit, their responsibilities towards their payment plans, and the benefit of their education will drive students to be more responsible than an argumentative, harassing approach. These are students who have fallen slightly behind on payments, not ‘deadbeats’ who have absconded with a debt. If students are not severely delinquent, harassing phone calls will just push them further away and could lead to further defaults. Find a partner that will counsel your students about the importance of their education and the importance of sticking with their commitments.

As a side note, this is also important to your own reputation, as you want to keep a solid reputation as an institution that has partners that help your students, not one that lets your students be harassed. A pleasant experience will also help you get referrals from students who recognize that they are being treated with respect.

The big picture: Understand that life happens

Despite all of your best efforts, and even if you follow every bit of my advice, there is still a chance that one of your students may default. Unexpected medical bills, job loss, or a variety of other life-impacting situations can prevent even the most committed and responsible student from being able to follow-through on his or her payments. As long as you recognize this, and keep the big picture of your overall school in mind, everyone wins.

SEAN STEINMARC, in his leadership role at TFC Tuition Financing, is working to improve the affordability of education for *all* students. A graduate of The Wharton School at the University of Pennsylvania, Sean spent the first eight years of his career in financial services leadership roles across a Top 5 global bank and a Fortune 100 company. His primary roles were converging technology & business strategies and improving operational processes. After a few years in education financing, Sean launched an award-winning technology startup to help brands & nonprofits solve consumer engagement challenges and raise awareness through a combination of gamification & cause marketing. Sean now applies his financing, technology, and customer experience skills at TFC, which has spent nearly 50 years helping schools increase enrollment and revenue with financing options for students who might otherwise be turned away.