Some universities will begin accepting the nontraditional payment method as consumers seek flexible spending options
Nontraditional payment channels don't always have the same consumer protections as traditional banks.
Many college students will soon be able to pay their tuition via PayPal or Venmo, as traditional institutions move to offer alternative payment methods for this major expense.
More Americans are leaning on flexible payment options as persistent inflation has made it difficult for households to afford basic necessities. But convenience tends to come at a cost, so it's important to know the risks before trying out a new payment service.
Personal-finance experts warn that nontraditional payment channels don't always share the same consumer-safety protections as options linked to traditional banks, and can come with unexpected fees attached. Here are a few things to consider before paying tuition with PayPal (PYPL) or Venmo.
Look out for transaction fees
While digital wallets can offer convenience, that ease of use may come at a financial cost. Schools may charge a service or convenience fee for using PayPal or Venmo, according to PayPal, and that fee is set by each school and its respective platform partner. Make sure you know how much the fees are if you choose this option.
Bryan Dickson, education-policy director at the National Association of College and University Business Officers, outlined how these fees can add up quickly on a typical tuition bill, drawing a parallel to what already happens with credit-card fees: "If there is a 2.5% credit-card transaction cost for a $25,000 tuition payment, that represents $625 that the institution may have to absorb, or where permitted, pass on to the payer."
Venmo and PayPal balances are not always insured like regular bank accounts
Students and parents can use their bank accounts, credit cards or PayPal or Venmo balances to pay tuition through the new integration at participating schools, according to PayPal, which is Venmo's parent company. PayPal's buy-now-pay-later service is not available for tuition payments.
If you choose to use your existing funds in a standard PayPal or Venmo account, it's important to understand that the balance is not insured like it would be in a traditional bank. Banks typically protect up to $250,000 in consumer accounts with insurance from the Federal Deposit Insurance Corporation - a safety net that most peer-to-peer transaction apps lack.
If you have a Venmo or PayPal debit card, have used Venmo's cash-a-check feature, are enrolled in direct deposit through either company or have purchased cryptocurrency through either company, your balance held in U.S. dollars is eligible for "pass-through" FDIC insurance at one of PayPal's partner banks: Goldman Sachs, Wells Fargo or Chase. Even if your money is insured this way, it's important to read the fine print: "FDIC pass-through insurance protects against the failure of a Program Bank, not the failure of PayPal," the company's website says. "PayPal is not a bank, does not take deposits and is not FDIC insured."
Be careful with credit-card payments - even when you're not using Venmo or PayPal
Whether you pay the university directly with a credit card or have one attached to your PayPal or Venmo account, it's important to have a plan to pay it down and understand the implications of making such a large purchase on credit.
Bank-rate credit-card expert Ana Staples warns that carrying a massive tuition balance on your card "spikes your credit utilization, which is a huge hit on your credit score." Your credit-utilization rate is the ratio of debt compared to your available credit. A common rule of thumb is to keep that ratio below 30%, meaning your balance stays under 30% of your available credit.
Make sure you're making payments on time, too, as late or missed payments can ding your credit score. A dip in your credit rating is visible to future lenders: "In the future, if you are looking for an auto loan or even a mortgage, it will definitely be there, so you have to be really careful," Staples said.
The payment landscape is evolving
Venmo parent company PayPal integrated with three major higher-education payment platforms serving thousands of colleges and universities across the country. Venmo and PayPal are already available for students at Michigan State University, Texas Tech University, Kansas State University, Bellarmine University and Butler University, with a broader rollout to additional universities expected throughout the year.
Students "already use PayPal and Venmo for rent, for splitting a bill and for paying friends and family back," said Frank Keller, president of Checkout Solutions and PayPal. "Now that same experience shows up as a payment option for tuition too, right at checkout."
While it's nice to have flexible payment options, the reason consumers use them can be troubling. Budget-squeezed consumers are increasingly turning to buy-now-pay-later loans to finance common purchases like gas or groceries, and many Americans - especially those without access to traditional banking services - now collectively hold billions of dollars in digital payment apps like PayPal, Venmo or Cash App.
"If you're using Venmo as a bank, you have your balance sitting there, but that balance isn't FDIC-insured as bank deposits are," Staples said. "Some people might want to use them as an alternative to a bank, but ... remember: They are not banks."
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-Genna Contino
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