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One method of paying tuition bills meant to help limit loan borrowing can actually end up sticking college students with exorbitant penalties and fees that can quickly cause financial hardship, a blistering government report found.

The Consumer Financial Protection Bureau (CFPB) identified a number of flaws and risks with college tuition payment plans in a new 35-page report. Payment plans have traditionally been presented as a relatively innocuous tool to help manage college bills and even avoid student loans, but, per the CFPB, often have less-than-ideal terms in their fine print.

The plans let students spread payments out over time — often every month — instead of paying all at once at the beginning of a semester. The pitch for these plans is that they make it much easier for students and families to afford tuition because they allow you to use income to pay versus making a lump-sum payment upfront. While there are set-up fees ($37 on average, per the CFPB), that amount typically pales in comparison to loan interest.

For students who always pay on time, payment plans are often beneficial. But if you start missing payments, the CFPB report says the consequences can be severe and surprising, essentially turning the payment plan into an expensive loan.

“In some cases, these late payment penalties may lead to situations where a student owes more than they originally borrowed on a product that was marketed to them as no-cost,” the report found.

How is that possible? For example, Ohio State University’s website lists a payment plan late fee of up to $300 for the first missed payment and $25 for subsequent installments. Other plans’ late fees are calculated as a percentage of the money owed, and the CFPB report identified APR finance charges as high as 18%. (By comparison, federal student loans this year carry interest rates between 5.50% and 8.05%, while private student loans currently range from about 5% to 17%.) Additionally, there are often returned payment fees on top of the late fees, and these average $29 per instance.

CFPB: Payment plans are actually a 'type of loan'

If you sign up for a payment plan and then fall behind on payments, you could get hit with a high fee right off the bat and then watch your balance grow over time. Ultimately, if you don't pay the balance off, you could be dealing with coercive debt collectors and your credit score could take a hit.

“While tuition payment plans are generally marketed as alternatives to loans, many tuition payment plans should be understood as a type of loan,” the CFPB said.

Beyond accruing interest on your debt, you will also likely run into trouble with your college if you owe money on a payment plan. You may be blocked from enrolling in classes, and colleges can even withhold your transcripts, meaning you might not be able to access your credits if you try to transfer — a controversial practice that is banned in at least 10 states.

The National Association of College and University Business Officers (NACUBO) pushed back on the CFPB’s criticism of payment plans, arguing that these plans make it possible for many families to afford college. Often, their fees are relatively reasonable, says Liz Clark, the association’s vice president for policy and research, citing the CFPB data on set-up fees.

“Typically, tuition payment plans offer better terms than say a private loan or if a student or family opts to pay with credit cards,” says Liz Clark, the association’s vice president for policy and research. “Both with private loans and credit cards, interest is accruing over time, whereas typically with tuition payment plans you do not have that interest accrual.”

Still, she acknowledged that some colleges and universities should review their policies and make sure they’re "putting students first."

Don't take out a payment plan if you might miss bills

Brendan Williams, vice president of knowledge at college access nonprofit uAspire, says the CFPB findings are concerning and a reminder that you shouldn’t take out a payment plan if there’s a decent chance you’ll miss payments.

When advising families, Williams says his organization has always been relatively cautious regarding tuition payment plans.

“I think definitely with some of the items they’re calling out, I would say we were right in our cautious approach and we should probably be even more cautious when students are thinking about tuition payment plans," he says.

In light of the report, he would only recommend tuition payment plans if you or your family has the money and it’s just locked up, or if you have enough income coming in each month to comfortably make the payments. Otherwise, student loans are a better option, even if that means using both federal and private loans, he says.

While tuition payment plans reduce the amount you owe in August or September, they only give you a few more months to come up with the money, so you should be honest about whether it’s actually going to be possible to pay each month. “If you look at that estimated bill and you're saying, ‘There's no way we can pay this,’ there's also no way you can pay the tuition payment plan,” he says.

The CFPB encourages universities to reform their payment plans and recommends that students read the fine print to understand the consequences of missing payments.

“Tuition payment plans offered by schools may look like a good option, but this report shows student borrowers can end up paying high fees, be forced to sign away their legal rights, or even have their transcript withheld by their school,” CFPB Director Rohit Chopra said in the release.

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