Can You Use Student Loans To Pay Past-Due Tuition? – Forbes Advisor – Technologist

When deciding how to pay for school, understanding the nuances of how loans and financial aid work can feel like solving a mystery.

Occasionally, I get reader messages asking for help navigating the financial aid process. The latest is from a student having difficulty pursuing grad school because their undergrad diploma and transcript are being held due to an unpaid school balance.

This isn’t uncommon. An estimated 6.6 million Americans have “stranded credits,” which are earned credits a school withholds due to an unpaid balance of tuition or fees. This debt collection tactic can prevent students from getting their diplomas and accessing transcripts needed to continue school or get higher-paying job opportunities.

The message inspired me to research whether you can use student loans for past-due tuition and other ways students can resolve unpaid school debt. Here’s what I found.

Federal Loans Awarded Today Can’t Pay Past Charges

Millions of students complete the Free Application for Federal Student Aid (FAFSA) each year to receive federal grants, scholarships and student loans.

My big question was, can new funds awarded by the FAFSA pay past-due tuition? After doing a deep dive into the Federal Student Aid Handbook, I found that schools can only allocate up to $200 in current federal funding to past charges.

Unfortunately, submitting the FAFSA today and getting awarded funds for the current academic year isn’t a solution for resolving unpaid charges from prior academic periods.

Private Loans Can Pay Past-Due Tuition (With Conditions)

Private student loans are a different animal and come from independent lenders, so schools aren’t beholden to the same federal regulatory requirements.

While researching, I found you can often use private student loans for past-due balances as long as you meet a few conditions. Below are examples of requirements for five popular private lenders that offer past-due tuition loans.

Should You Take Out Student Loans for a Past-Due Balance?

Even if you can get approved for private student loans to cover a past-due school balance, it’s crucial to weigh the pros and cons.

Borrowing money—whether this is your first or a subsequent loan—can put even more tension on a tight budget, especially since payments for private loans may be due while you’re in school.

In some cases, you can defer private loan payments until after graduation, but interest will still accrue on your balance. Using a student loan calculator is a good way to map out the affordability of loan payments depending on the amount you borrow and interest rate.

Ask an expert

What factors should borrowers consider when shopping for a private student loan?

Andrew Paulson

Advisory Board Member

Angela Moore

Advisory Board Member

 

To qualify for private student loans, you generally need to be a U.S. citizen or permanent resident or have a co-signer who is. You must also be of legal borrowing age. Adding a co-signer can enhance your application, but remember that they will be jointly liable for the debt.

Choose a lender with the lowest interest rate and the most flexible repayment terms. Private student loans can have either variable or fixed interest rates; if possible, opt for fixed interest rates to ensure predictable payments.

Read reviews on the lender before selecting to ensure they are a reputable organization. Your school’s financial aid office can generally direct you to a list of recommended private student lenders.

 

Improving their credit score can help students qualify for better loan terms. This can be achieved by paying off existing debts, making timely payments and correcting any errors on credit reports.

Students should research various loan options, including federal, state and private loans, and compare terms and conditions to find the best fit for their situation.

Having a clear budget and financial plan can demonstrate to lenders that the student can manage their finances responsibly, which might improve loan terms.

If possible, having a co-signer with a strong credit profile can help secure better interest rates and terms.

Before taking out loans, students should exhaust all available scholarships and grants. Grants do not need to be repaid.

Alternative Ways To Handle Outstanding Tuition Balances

Private student loans are just one way to eliminate a past-due school balance. These are other steps you could take if an unpaid balance is holding you back from receiving your transcript or diploma.

1. Get Familiar With State Law and Federal Regulations

Some states have enacted or proposed laws to regulate schools’ use of withholding transcripts as a debt collection strategy.

For example, California, Colorado, Connecticut, Illinois, Indiana, Maine, Minnesota, New York, Ohio, Oregon and Washington prohibit withholding of transcripts for debt altogether or in certain instances, like when requesting records for a prospective employer.

On a national level, the Department of Education announced in October 2023 that colleges and universities are prohibited from withholding transcripts for school terms when students used federal funding and paid in full as of July 1, 2024.

So, if you used federal aid to pay for at least some of your education, it’s worth contacting your school to see if you can get transcripts for those terms.

“While colleges and universities could technically issue partial transcripts in this instance and withhold unpaid credit transcripts, many colleges and universities are instituting policies in which full official transcripts will be released regardless of debt owed,” said Renee Earwood, an accredited financial counselor (AFC).

However, note that these new federal regulations don’t apply to issuing diplomas, according to Earwood. “A college or university may still require the debt to be paid in full prior to releasing a student’s diploma.”

2. Explore Payment Plans

Paying tuition in installments rather than all at once is another option for reducing your debt. Plus, it could help you avoid having unpaid school debt sent to collections, which can damage your credit score.

“Payment plans are a helpful option that most schools offer to students. These plans provide some flexibility and allow students to pay their balances over time,” said Bryan Dickson, director of student financial services and educational programs at the National Association of College and University Business Officers (NACUBO).

Data shows tuition arrangements are common. In a 2022 NACUBO Student Financial Services Policies and Procedures Report, 97% of surveyed institutions stated they offer student tuition payment plans. After negotiating and adhering to a payment arrangement, you may be able to re-enroll in school or get access to official transcripts.

3. Ask Your School About Alternative Forms of Aid

“In addition to exploring other financial aid options and tuition payment plans, some schools will offer small, short-term emergency grants to assist students who are nearing graduation,” said Dickson.

For example, the University of Pennsylvania may reevaluate your circumstances and provide emergency grants or loans to cover academic expenses.

Additionally, explaining to your school why you didn’t pay tuition could make you eligible for relief. “If any of the unpaid balance is due to withdrawing from school after the withdrawal deadline, the student may be able to submit a request to have the school waive the bill,” said Earwood. “Many schools will consider this if the student had to withdraw for reasons such as a family emergency or a medical or mental health issue.”

According to Earwood, the best first step when dealing with unpaid tuition is to contact your financial aid office to see what emergency grants, scholarships or other financial assistance may be available.

How Should You Move Forward With Past-Due Tuition?

Denying access to transcripts for unpaid debt can make it harder for students to further their education and achieve the ultimate goal—gaining employment. For that reason, the practice of holding diplomas and transcripts for school debt is under scrutiny.

While you may be able to use loans for past-due tuition, exploring other options, such as payment plans and emergency grants, can be a more affordable way to clear school debt and access credits you’ve earned.