November: Budgeting for Credit Card Fees

For some schools, one of the many benefits of using a tuition management provider is so the school does not have to absorb the cost of a credit card transaction for tuition and/or fee payments.  While there are many “merchant service providers” available from which to choose if the school has been absorbing the transaction fee, many have different fee structures based on the amount of the transaction, which credit card is used, and how many transactions take place per month.  Some may even have a “per transaction” fee in addition to the percentage.  Keeping track of the various percentages and service charges can make payment reconciliation extremely difficult, frustrating and time-consuming.

Further, if the school absorbs the cost of the transaction, parents are more likely to use credit cards, which could significantly impact the amount of revenue your school has planned to receive in its budgeting process.

Until recently, schools could use a tuition management provider to put the responsibility of fee payment back to the parent paying the tuition.  This “convenience fee” model has been honored by 3 of the 4 major credit card providers, since VISA did not permit convenience fee transactions for recurring payments.  Recently, VISA has opted to allow tuition-charging schools to pass this fee along to the consumer under a program called “Service Fee.”  So long as the transactions processed by VISA does not exceed a certain threshold, the processing fee can be passed along to the consumer in most States in the country.

However, the courts of some States have ruled that charging the fee back to the payer is not lawful.  The merchant (in this case, your school) is paying a small percentage of the transaction so the entire remainder of the amount is forwarded to the school.  The prevailing thought is that the merchant should be willing to accept this small fee in order to secure the full amount of the payment that’s due.  Unfortunately, since it’s not known how many parents will want to use their credit card from year to year, and since banking laws and credit card fees are always in a state of flux, most schools find it difficult to budget for credit card fees.

In the past, credit card utilization was frowned upon by many faith-based schools because their administrators did not want to require parents to go into debt to fulfill their tuition payment obligation.  Today, credit cards carry with them incentive programs (like airline travel miles or cash back rebates) so their usage provides a benefit to the parent.  Further, the mindset of today’s parent is quite different from the mindset of the parent of 20 years ago.

If tuition is $9,000 for two students at the school, then it would be advantageous for the parent to receive the airline miles that $9,000 would provide for them.  However, if the school doesn’t want to lose $270 (3.00% as a potential merchant fee) of the $9,000 if it’s been deemed that the fee cannot be redirected to a tuition-paying parent, or if the school wants to allow parents to use VISA (since many incentive programs are associated with VISA), then what’s a school to do?  If there are 100 families in this situation, then is the school able to absorb the loss of $27,000 in budgeted revenue to the credit card processor?

Here’s a suggestion.  After working on your budget, and setting your tuition schedule in place, add 3% to the figure.  Then, if a parent wants to pay in full by writing a check, your school can offer that parent an “upfront payment incentive” which is budgeted for!

Many schools I visit offer a $50, $100, or a percentage incentive (notice I did not use the word “discount”) for paying tuition in full and upfront before the school year begins.  While that’s a great incentive for the parent, it is oftentimes simply seen as a way to improve the school’s cash flow at the start of the school year, and, since there’s no way of knowing precisely how many parents will choose to pay upfront, such a program is rarely budgeted for.

If you increase your tuition by 3% before publishing it, your school can offer families a 2% or 2.5% incentive if they pay upfront and with a check.  If they pay with a credit card or over the course of the year, then the credit card fee has been budgeted for.

Here’s an example.  Let’s take that parent paying $4500 for each of their two children as mentioned above.  Let’s say your school offers a $100 incentive per child if the $4,500 is paid in full and upfront.  $100 of $4,500 is 2.22%…but $4500 per child is what’s really needed as a result of the actual tuition a parent will pay added to the amount of financial aid they’ll receive.  If that’s the case, it’s generous that you’re giving the parent a $100 price break, but you may not know where that extra $100 will come from to balance your budget.  Some school administrators have mentioned that less financial aid can be awarded to make up for the difference – but that’s not right either.  Perhaps you’ll need another fundraiser to cover the cost…but do you really want to have another fundraiser?

Further, if the parent wants to pay that $4,400 ($4,500 with a $100 incentive) with a credit card, and your school doesn’t want to charge the parent the credit card fee, then you’ll need to determine how you’ll compensate for another $121 (if your credit card fee is set at 2.75%).   Therefore, your school is not receiving $4,500 for this student; it’s receiving $4,279 from the upfront incentive and the fee your school will be giving the credit card company…and that’s only 95% of what your school’s budget needs.

By the way, if you’re still questioning if your school is a business or not, this exercise should remove all doubt that it is (in addition to being a ministry and being a school, too)!

If you add 3% of $4,500 ($135) to the $4,500 of tuition, your school’s tuition now becomes $4,635.  That’s advantageous for a couple of reasons.  First, if you offer a payment plan of 10 months, any parent can do “10 math” in their mind, and calculate their monthly tuition payment to be $450.  If you offer a 9 month payment plan, $4,500 is easily divisible by 9 to the tune of $500 per month.  $4,635 makes mental math a little more difficult to do, and keeps the conversation focused on the educational environment, rather than on the parents’ wallet.  You’ll hear more about those advantages in an upcoming article.

With your tuition now at $4,635, you can offer parents a little more than a 2.9% incentive by giving them $135 if they pay in full, before the school year starts, and pay with a check or a direct debit from a savings or checking account.  If they pay over time, or if they pay in full with a credit card, there is no percentage provided, and the 2.75% fee from the credit card company is already budgeted for.

What if you award copious amounts of financial aid?  Keep in mind that your “calculated cost” figure is actually $4,500, and award financial aid based on that figure, and not the $4,635 figure.  Is the result the same as what was mentioned above?  It could be, but the mindset and the terminology is completely different.  For instance, if the parent receives $2,500 in financial aid, when you deduct it from the “announced tuition” of $4,635, the parent will be expected to pay $2,135.  2.75% of $2,135 is $58.72, so your school would be receiving a total of $2,076.28, which is a little more than the $2,000 in revenue which would have resulted if you awarded $2,500 in financial aid and the “announced tuition” was $4,500.  And “a little more” means you don’t have to find ways to make up for “a little less.”

Today’s parents like incentives.  If you can offer them a cash incentive, and their credit card provider can offer them the perks of membership, then you can create a more positive revenue environment in your school than what would result by telling a parent they can’t use their credit cards, and then hoping to make up the revenue from another source – like yet another fundraiser – to balance the budget.

© Michael V. Ziemski, SchoolAdvancement, 2014-2016