Some student-loan borrowers are getting kicked out of classes and racking up debt after being placed in shady payment plans with minimal legal protection, a federal consumer watchdog says

• The CFPB released a report on tuition payment plans that colleges offer students.
• It found the plans can have predatory terms that include big late fees and aggressive debt collection practices.

Some students might not even have to graduate before they find themselves facing abusive debt collection practices.

On Thursday, the Consumer Financial Protection Bureau released a report highlighting a risky agreement nearly 4 million students sign up for each term: tuition payment plans offered by their school. It seems innocent on the surface — a student can sign up for a plan that would allow them to spread the upfront cost of their tuition into typically three to six interest-free payments so those who cannot afford to make the entirety of the payment can still attend classes.

But when the CFPB dug deeper, it found the payment agreements have confusing, and potentially illegal, terms and debt collection practices. Students who miss just one payment could end up with hundreds of dollars in late fees, their meal plans could be stripped away, and they could be kicked out of their classes.

"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 a statement. "Colleges and universities should take a hard look at their repayment plans and avoid subjecting borrowers to high fees or coercive debt collection practices."

The report analyzed 450 institutions' payment plans — 60% of which outsourced management of the payment plans to third-party financial service providers, and it found that the interest-fee plans aren't as affordable as they sound. Within the sample, 89% of schools charged an enrollment fee that could be as high as $250 and 44% charged late fees averaging $46, with one school charging $300 for a student's first late payment.

The CFPB also found that in some cases, consequences of missing a payment are not even disclosed in the contract, meaning borrowers might have no idea of the fees they could accumulate if they fall behind on the plan. In the event of a missed payment, colleges could send students to collections and their credit scores could take a hit. At that point, the student might not have any legal protection because some payment plans require the student to waive their rights to participate in any class action lawsuit.

One student told the CFPB that their federal loans and grants did not cover their tuition payment, so their school demanded the student pay them in full or enroll in a payment plan that would subject them to late fees. "If I did not do this I was told my classes would be dropped. I do not believe this is fair and have never been subject to this in past year," the student said.

What happens to students who miss tuition plan payments

The late fees are just the start. Once a student misses a payment, they are subjected to aggressive debt collection practices, and confusing terms in the payment agreement could leave the student without any legal protections. The report said that in some cases, borrowers might even be unknowingly signed up for a tuition payment plan if their federal student aid is not enough to cover the full tuition cost.

"When these situations occur, the use of the product could lead to fees and financial difficulties for students," the report said.

Additionally, the inconsistency among payment plans can leave students facing disparate consequences for missing a payment. For example, a student with a loan of $525 could end up paying between $69 and $399 in fees, based on the CFPB's sample — and it could leave the student owing more than they originally borrowed to finance their education.

Following a missed payment, the school could have the authority to withhold a student's transcript, which could prevent the student from moving to a different school or getting a job. The CFPB also found that some schools penalized students for missing payments by deactivating their campus cards, along with "dismissal of students from residence halls, suspension of meals plans, and suspension of participation on athletic teams, along with late fee charges and interest charged on unpaid balances," the report said.

The CFPB said it will continue to monitor schools' payment plans to ensure they are in accordance with consumer law. Beyond predatory behavior while a borrower is in school, President Joe Biden's administration has also scrutinized other potentially abusive and misleading behavior that could impact both private and federal borrowers, including scams related to federal student-loan forgiveness. With the higher education industry undergoing a series of changes right now, the CFPB and Education Department have encouraged borrowers to be extra vigilant of bad actors looking to profit from confusion — and leave borrowers with spiraling debt loads.