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No Debt About It

Well-crafted policies—and a touch of toughness—prompt students to pay now, not later.

By Dennis DeSantis and David Glezerman

Unfortunately, not long before John’s scheduled return to the university, his father underwent emergency surgery. As his father slowly recuperated, the last thing on John’s mind was informing the university that he would not be in attendance for the next semester or two. So the institution still included John in its enrollment counts, kept his reservations for a residence hall bed and course seats, and committed thousands of dollars in financial aid to his sophomore year. In short, the university generated a student receivable—it expended money or earmarked services on John’s behalf that he would not be paying for anytime soon.

Sound familiar? John’s story and others like it probably play out at your institution every year, leading to an undesirable amount of student receivables.

Ever-More-Extended Terms

When a student registers for courses, he or she sets in motion a chain of events unique to the educational institution. Those may include reserving class seats for the student, completing verification of financial aid enrollment, managing funds for financial aid, finalizing housing arrangements, identifying low- or over-enrolled course sections, calculating FTE counts, and projecting tuition revenue. The institution also determines the charges associated with the student’s choice of courses and housing, applies any financial aid, and calculates the outstanding balance.

If every student satisfied his or her outstanding receivable balance in a timely manner, student registration numbers would provide stable, reliable information for making decisions. Of course, payments often do not arrive on time—or at all. Here’s why not all students may be paid in full by the beginning of classes:

  • Tuition and fees have steadily risen over the past several years, while financial aid programs have lagged behind.
  • Many institutions now offer short-term (three or four installments) or extended payment plans.
  • Registration policies may allow students to initially register for courses through the drop/add period. This assumes that tuition and fee assessment is generated only upon registration.
  • Some institutions allow students to register for future semesters while they still owe tuition and fees for current or past semesters.
  • Students often file free application for federal student aid forms well beyond the deadline or do not comply with financial aid verification. Delays in filing FAFSA forms and loan applications or in providing verification data contribute to lengthy waiting times for students to learn about their aid packages. Providing credit for estimated financial aid on initial term bills sometimes postpones the inevitable—an outstanding balance for a student with limited ability for on-time payment—and produces a delinquent receivable for the institution.
  • Students forget or delay their student loan entrance interview, so the proceeds of their approved loans are returned to the lender.
  • Third parties sponsoring students may receive their invoices later than others if third-party invoicing has not been integrated into the billing process and must be done manually or separately.
  • Students and parents requesting funds from 529-type savings plans cannot do so until they receive the appropriate tuition and fee invoices.
    Students or parents who have not engaged in adequate financial planning simply do not have the resources to pay the outstanding account balance. Rather than focus on financing a college education for the four years needed to earn a degree, many families struggle to pay for one term at a time. Independent or nontraditional students may even be working while attending part time, needing installment plans to buy time so that they can use their earnings to cover tuition payments.

In light of these conditions, what can you do to prompt faster payment and reduce debt-collection activities? For starters, make paying for education a priority for students and their families.

Keeping Them on the Level

Outside Assistance

If your institution uses third-party collection agencies to pursue payment of student receivables, remember that these companies work on a contingent-fee basis. Your institution will incur no expense unless the agencies collect from your former students. Here are three tips for working with collection agencies.

1. Understand that agencies usually charge a lower percentage for handling accounts referred for the first time than they will for second or subsequent referrals. The more time that has passed, the more difficult it becomes to collect a delinquent account.

2. Hire at least two collection agencies so that you can compare their performance. Develop a list of performance measures, such as recovery percentages (amount collected versus dollars referred for collection), net dollars collected, and number of complaints received from students.

3. Refer any student inquiries to the appropriate agency after referring the account for collection. Never discuss or make any payment arrangements with the student debtor, who has had sufficient time and many opportunities to resolve delinquencies with your institution. Allowing debtors to bypass the collection agency—perhaps in the hope of negotiating better payment terms—undercuts the agency’s effectiveness and leads to the same result: no monies collected.

Often, higher education is perceived to have such “deep pockets” that families do not consider on-time payment important. And, by accepting credit cards for tuition payments, an institution might unwittingly foster the perception that it isn’t concerned about how quickly payment will be made.

As a result, only when the school imposes late fees or interest charges do students and their families move tuition payments higher up their list of priorities. In fact, students who borrow from federal or institutional student loan programs may develop a false impression of their repayment responsibilities should institutional credit policies and procedures lack the teeth of enforcement.

From Lissa Perrone’s perspective, controlling debt levels can help students stay enrolled and potentially graduate. “By keeping that debt level in check,” says Perrone, associate director/bursar at Oregon State University, Corvallis, “students don’t accumulate a large balance that then forces them to sit out a term while they pay it down by working.”

Oregon State allows its students to carry forward a maximum balance of $2,200. Other institutions limit the carry-forward balance to $100 or less or do not allow balances to carry forward at all between academic years or in the final term before graduation. It becomes more difficult to secure full payment once a student leaves for the summer or graduates.

Creating or modifying receivables-related practices calls for striking a balance. On the one hand, you don’t want to craft overly restrictive policies and procedures that impede students from completing their educations or even remaining in school. A tuition-dependent institution might prefer to maximize its cash flow, but a strict payment policy should not hinder student recruitment or retention efforts. On the other hand, loosely enforced regulations may encourage students to “play the system,” which can lead to higher costs for all students to help cover bad debt and collection expenses.

Weighing Decision Factors

In determining what level of receivables or collection risk your institution should assume with individual students, take these eight factors into account.

  1. Enrollment/retention requirements. Do you want or need to increase or maintain enrollment levels? What are the potential budget implications if you ease credit policies because of enrollment concerns?
  2. Revenue recognition. Will you require students to pay their tuition and fees in full, or through agreed-upon installment plans, before recognizing tuition and fee revenue?
  3. Level of acceptable dollar risk. What balance will you allow students to carry forward before stopping them from continuing their education?
  4. External economics or issues. What is making it more difficult for students or families to pay?
  5. Availability of institutional resources. Is the institution in a position to fund or provide solutions to gaps between unmet need and actual charges?
  6. Financial aid process. Will you issue an initial credit for estimated or pending financial aid? While the financial aid office usually can estimate a student’s aid package, information obtained after awards are made often reduces the expected amount of financial aid funding. To reduce potential delinquencies, have a mechanism in place to promptly notify students about such status changes.
  7. Accounting for bad debt expense. How will you report the collection of tuition and fees from past years while fulfilling audit requirements and adhering to management philosophies? Changes in tuition discounting formulas could transfer the institutional expense from a bad debt reserve to a financial aid-based cost.
  8. Penalties for failure to follow institutional policies or procedures. For example, do students remain liable for tuition when they withdraw from or just stop attending classes after a designated, advertised deadline? Is a student responsible for paying room and board expenses if he or she decides against living in a residence hall and the room isn’t resold?

The decision to toughen your policies on student accounts receivable in these and other ways can lead to conflict and tension. For instance, students may demand to know, “Why should I pay for something I didn’t receive or use?” But addressing the issue can also lead to thoughtful conversations about how to help students stay in school so that they can eventually graduate and become “giving” alumni. For those students who must withdraw for financial or other personal reasons, outline ways in which your institution can keep the doors open for such stop-outs to re-enroll and complete their education.

No Payment, No Service

A Simplified System

Students at Temple University in Philadelphia used to go through a two-step registration process. First they would register for classes and wait for the tuition bill to arrive. Then they would have to confirm their classes, either through mail, telephone, or in-person contacts. Students who did not confirm their registrations would have their classes canceled.

This process proved confusing to students and staff members alike. Typically, after the twice-a-semester registration cancellations had occurred, more than 70 percent of the canceled students were reinstated into their classes—sometimes before the cancellation notices were even issued.

In the summer of 2005, Temple decided to implement changes in its registration and billing processes, effective with the spring 2006 semester. The decision followed several months of review and deliberations by a president-appointed task force on student financial services.

New Procedures
The task force, which had been charged with streamlining and simplifying how Temple students registered for classes and paid their tuition bills, recommended new procedures that:

  • Eliminated the confirmation process, except for approximately 4,500 financial aid recipients whose estimated aid was sufficient to pay their entire balance. Their financial aid would be credited only after they confirmed their registrations.
  • Required all other students to pay at least the minimum amount due on their bills (one third of the current semester charges, plus all prior semester balances) to avoid registration cancellation.
  • Reduced the number of installments from four to three. In essence, this increased the minimum down payment from one quarter to one third of the total amount due.
  • Enforced the service restriction requirements for delinquent accounts. In the past, many students with past due accounts had been able to have their service holds lifted by pleading a case of special circumstances.
  • Allowed for only one registration cancellation date before the start of classes each semester, rather than two. Students who register after the billing due date, which is used to determine the potential cancellation segment, are considered enrolled and therefore responsible for paying for their classes—unless they withdraw before the end of Temple’s drop/add period.

Strong on Communication
Temple began communicating these changes to students, parents, and the university community in October 2005. The extensive communications campaign used e-mail, postcards, posters, and constituent meetings to convey the changes and new expectations. Once the registration date for the spring semester had passed, Temple sent targeted e-mails to unpaid or unconfirmed students. The daily e-mails warned that their registrations were subject to cancellation. The final e-mail indicated that classes would be canceled “tonight.”

Implementing the billing and registration cancellation changes was part of the task force’s list of overall recommendations to clarify and improve financial services at Temple University. NACUBO’s recently released Student Centered Financial Services: Innovations That Succeed provides more insight into Temple’s change process, as well as case studies from other institutions of higher education.

Of course, late fees and other penalties are not always sufficient deterrents to late payments. Students may prefer paying a $50 late fee next week instead of making their $5,000 payment today. This scenario is replayed many times when there is insufficient financial aid to pay the entire bill, leaving a remaining balance to be paid out-of-pocket. The student or family does not feel compelled to immediately resolve the balance—until the institution imposes a sanction stronger than a financial penalty.

If you really want to get the attention of a currently enrolled student, forego the e-mail, paper notice, or phone call. Instead, place a service restriction or hold on institutional services.  A financial service restriction may withhold grades and/or transcripts, library privileges, future registrations, graduation, and other university services as a result of nonpayment of tuition and fees. Blocking university services, often a last resort, forces a student to visit a student financial services area to resolve the situation. Many students, however, delay that visit until the moment they need a particular service.

Joanne Stumme, director of university collections at the University of Pittsburgh, believes that timing is a key component of service restrictions. “The placement of service indicators is an effective collection tool,” notes Stumme, “especially if the placement of the service indicator is timed to coincide with registration periods or the availability of grades and diplomas.”

Service restrictions can even apply to former students with outstanding financial obligations. Withholding diplomas and transcript services of such students can facilitate the resolution of delinquent financial obligations, although you’ll probably have to carry the debt until the former student needs the transcript or degree verification.

Time to Get Tough

Even the strictest service restrictions may not provide enough impetus to resolve an outstanding tuition balance. You’ll have little leverage, for example, with a former student who dropped out of school, failed to make satisfactory academic progress, or was dissatisfied with the quality or type of education received. Any desire he or she has to resolve the balance amicably may disappear once late fees, interest, or other penalty charges are assessed—unless that student wants to return to the classroom at your institution or elsewhere.

Beyond sending a series of additional bills or late notices (whether paper or electronic), you’ll need to employ other tools to resolve the most stubborn delinquent accounts.

Internal collection departments. Larger institutions are more likely to have an internal collections department or collection specialists working within the student accounts office. These staff members should resolve account delinquencies by using scripted discussion points to solicit full payment or arrange for special short-term payments. To facilitate recovery of the most difficult types of accounts, staff should also have in-depth experience or specialized training in collection techniques.

Third-party collection firms or attorneys. Consider using a collection agency once you’ve exhausted your internal efforts and resources or once students have withdrawn, indicated their intent not to return to school, or resisted all reasonable efforts to encourage payment of their delinquent debts. Because many consumers believe that higher education institutions are blasé about debt collection, appeals from a third-party collection firm speak to the seriousness of the situation. 

Assigning delinquent accounts to a third party for follow up also frees your institution to focus on its primary responsibilities. “By vesting account collections to companies [of which] the core competency is receivables management, institutions can effectively increase cash flow while allocating resources to other student-oriented functions,” notes Scott Nicholson, president of Enterprise Recovery Systems, Inc., an Illinois-based collection agency.

Credit bureau reporting. Another option is to report delinquent student accounts to credit reporting agencies, also known as credit bureaus. Even the suggestion of doing so may prompt the debtor to pay off his or her account rather than risk the negative rating associated with a delinquent account.

According to Consumer Action, a national nonprofit education and advocacy organization, 43 percent of respondents to a recent survey said that they check their credit reports once a year. That percentage will undoubtedly grow, along with incidences of identity theft and account fraud, as people keep closer watch on their creditworthiness. Given their greater awareness of credit scores, students may have a strong incentive to settle outstanding education debts.

Although many individuals believe that paying the debt will clear their credit record immediately, the reporting agency will actually reflect the consumer’s delinquency for seven years. Federal law obligates educational institutions to regularly update account status. Failure to provide and report accurate credit information to reporting agencies leaves an institution at risk for fines and other penalties.

A Favorable Outlook

Using these tools in conjunction with fair and consistent credit policies and procedures will help you maintain a manageable student account receivable portfolio. Educating students about institutional expectations for on-time bill payments and sound personal financial planning will help you ensure a more positive customer service environment while expediting cash flow.

And don’t forget the life lesson that is made clear to all when holding students to strictly enforced payment policies and procedures, points out Paul Tyler, bursar at Baldwin-Wallace College in Berea, Ohio. He says, “Maintaining a reasonable and consistent standard shows students, administration, and even alumni that, while everyone receives fair and equal treatment, student finances are an important part in molding one’s educational experience.”

DENNIS DESANTIS is associate vice chancellor of student financial services, University of Pittsburgh, andDAVID GLEZERMAN is university bursar, Temple University, Philadelphia.