Student Borrower Protection Center Investigation Finds Millions of For-Profit School Students Targeted by “Buy Now, Pay Later” Products; PayPal Continues Rise as Leading “Shadow Student Lender” Despite Allegations of Past Abuses
March 3, 2022 | WASHINGTON, DC — Today, the Student Borrower Protection Center (SBPC) released the results of an investigation alerting the public that emerging point-of-sale lending firms are driving students toward dangerous, lightly regulated loan products and propping up a startling array of questionable for-profit schools. These loans, particularly those available in the rapidly growing “Buy Now, Pay Later” (BNPL) space, lack many of the key protections consumers rely on in other financial markets and involve a range of hidden fees and other hazards. Nevertheless, an SBPC review has identified more than 100 unaccredited and otherwise dubious for-profit schools that market point-of-sale financing such as BNPL credit as a variety of student loan.
The SBPC is warning students that using forms of credit like BNPL to finance attendance at unproven, unaccredited, and/or lightly or wholly unsupervised programs could put them at massive risk. In particular, students could face huge and unexpected fees, see damage to their credit, be left with no protections in the event of fraud, lose the ability to seek justice in the courts in the event of a dispute, and more.
A copy of the SBPC’s report is available here.
A set of exhibits documenting the SBPC’s findings is available here.
“Today’s report exposes yet another industry bent on making a buck through the student debt crisis,” said SBPC Director of Research & Investigations Ben Kaufman. “Policymakers and law enforcement at all levels must step in to protect borrowers from the unholy but ever-more prevalent marriage of dubious schools and risky private credit.”
Borrower Alert: Beware the Explosion of For-Profit Schools Touting Risky “Buy Now, Pay Later” Credit as a Form of Student Loan
As millions of Americans continue to grapple with economic disruptions stemming from COVID-19 and the expiration of pandemic-related economic support programs, for-profit colleges and education providers have seen rapid growth. This trend has been particularly pronounced among companies offering short-term, credential-based courses that purport to lead to jobs.
Where loans and debt are involved, the emergence of credentialing programs has proven to present huge risks for students. The SBPC has long warned that consumers face extreme danger from for-profit schools driving students to use increasingly exotic forms of private credit as methods for tuition financing. These dangers are particularly present among job training “bootcamps,” which often lock students into expensive debt for programs that fail to live up to their promises.
After the Great Recession, for-profit schools were caught engaging in egregious recruiting practices to enroll students, and then loading those students with debts they would never be able to repay. Now, the SBPC is warning the public to be wary of the next step in the evolution of questionable for-profit schools posing danger to students: these institutions’ growing practice of directing students to use risky point-of-sale credit products such as “Buy Now, Pay Later” loans as a form of student debt.
A Flood of BNPL Lenders into the Shadow Student Debt Market is Putting the Public at Risk
Based on the results of an investigation into the dangers of using point-of-sale credit as a form of student debt, the SBPC is now warning prospective students about the following key, new areas of risk:
- Borrowers should beware of dubious for-profit schools advertising “Buy Now, Pay Later” credit as a student loan. BNPL is an emerging form of installment loan traditionally tied to the retail sector. A broad assortment of consumer advocates, legal practitioners, members of both houses of Congress, and regulators have warned that it could pose substantial dangers for consumers. However, BNPL providers appear to have rapidly emerged as sources of quick, risky loans for students to use toward education expenses, and to have done so at a diverse array of dubious, lightly- or wholly un-supervised, and otherwise untested schools and teaching programs. As the SBPC’s report identifies, these courses include apparently unaccredited for-profit classes in cosmetology, outdoor survival, reiki, information technology, midwifery, wigmaking, real estate brokerage, eyebrow microblading, and more. Several of these courses cost hundreds or thousands of dollars to attend.
- Students should know that if they finance learning through BNPL, they will lack many of the vital protections that borrowers rely on in other markets, exacerbating the danger already posed by these generally unregulated schools. For example, none of these schools face requirements for public reporting on student outcomes, making it impossible for students to assess programs’ widespread promises of leading to a job. Should claims about graduate outcomes, employment, or simple program quality prove false, students who financed their attendance at that school through a BNPL loan will likely not be able to dispute their charges or get a refund. Similarly, students considering financing education through BNPL should know that if they fall behind on their loans, they may face massive late fees and credit damage without protections available in other credit markets. More generally, the structure of BNPL loans means that students will likely have to begin repayment before any job or promotion that their course of study promised materializes, generating a timing mismatch that could heighten financial risk.
- Students should be particularly wary before using BNPL loans at for-profit “bootcamps” advertising training for careers in tech. The SBPC’s investigation found that BNPL companies entering the student loan space have quickly turned their attention to tech-focused vocational training programs, and that companies normally providing other private student loan products—such as Income Share Agreements—for students at these courses have begun offering BNPL. The SBPC has previously warned that credential-based programs promising jobs in the technology field are extremely risky, particularly when they drive students to finance attendance with fringe private student loans.
- In one case from the investigation, the online learning platform Udemy now markets “[l]earn now, pay later” financing through Affirm for an Amazon-backed “[Amazon Web Services (AWS)] Machine Learning Engineer” “nanodegree” promising “job-ready skills that will take your career to new heights.” But no independently audited information is proffered regarding historical student outcomes or job placement, let alone proof that any program graduates have gone on to earn the $131,001 “the national average salary” that Udacity points to in its marketing materials. Students who finance attendance at this program with BNPL would have little protection, and would likely have to begin repayment before any job materializes—if it does at all.
- Similarly, the BNPL provider Zip advertises partnerships on its website with the online learning platforms Coursera and Udemy, implying that BNPL can be used as a form of shadow student debt for any program in these companies’ catalogs. At Coursera, these courses include certificates co-branded with Google, Meta, IBM, and other prominent tech firms promising to help students “[g]et job-ready for an in-demand career” and “[b]reak into a new field like information technology or data science.” At Udemy, these courses cover “in-demand skills” such as coding, web development, and Microsoft office products, which the company claims will “open up new career opportunities” for students. But despite these programs costing hundreds of dollars, there is no available evidence to indicate that they consistently or even frequently lead to a job, let alone one at advertised average starting salaries for their given field. Students need to be aware that adding hundreds or thousands of dollars in BNPL financing to this already risky situation only amplifies its danger.
- Underscoring the same trend, the specialty student finance company Meratas, which has traditionally focused on lending risky income-contingent loans called Income Share Agreements to bootcamp students (and has drawn the attention of law enforcement in the process) has now expanded its product menu to offer BNPL to vocational students. Meratas represents that its new “Learn Now, Pay Later” BNPL product dubbed “Pay in 4” is particularly relevant for those “looking to up-skill, [or] re-skill.” The company leaves vague which specific programs its BNPL loans are available at or how prospective borrowers can verify the outcomes that those courses produce for students, but it displays the emblems of the embattled coding bootcamps Holberton and the Bloom Institute of Technology (formerly Lambda School) and touts the logos of tech companies including Apple, Google, and Spotify under the header “Companies Hiring from our Partner Programs.” That Meratas has chosen to enter the BNPL space underscores that creditors across the board see a massive business opportunity at the intersection of shadow student debt, BNPL, and tech training—and that they are rushing to seize it.
- Students should steer clear of student financing from PayPal, which has failed to rein in bad practices and has instead doubled down on supporting questionable for-profits. In August 2020, the SBPC led a coalition of consumer advocates including Allied Progress, Americans for Financial Reform Education Fund, and the Student Debt Crisis Center in a campaign to draw attention to one key participant in the shadow student debt market: PayPal. As outlined in letters to the company and to federal law enforcement, PayPal was offering a risky, high-cost revolving credit product called “PayPal Credit” as a point-of-sale tuition financing option at hundreds of dubious for-profit schools. PayPal Credit involved an APR over 25 percent, late fees of up to $39 per missed payment, and a deceptive “deferred interest” provision that could surprise borrowers with hundreds of dollars of added interest charges after several months in debt. Underlying these massive costs, PayPal and its partners were driving students toward PayPal Credit particularly to pay for unaccredited and lightly or wholly unsupervised programs including courses on makeup art, swordsmanship, hypnosis, veganism, and essential oils. In response to the SBPC and its partners’ advocacy, PayPal quickly claimed to have “begun taking action” to rein in the marketing and availability of its PayPal Credit product at for-profit schools.
- The SBPC’s new investigation revealed not only that PayPal has not cleaned up its act, but that the company’s conduct has deteriorated over the intervening 18 months. In particular, the SBPC found that more than one third of the dubious for-profit schools identified in its August 2020 letter continue to offer PayPal Credit as a form of student loan, some of them more prominently than before. Further, the SBPC found that new school partners continue to introduce PayPal Credit as a form of tuition financing, and that many schools have also begun to offer PayPal’s BNPL product as a form of student loan. These educational programs include a $15,000 tattooing course, cosmetology classes costing $2,000 to $7,000, and more. Borrowers should beware that they will continue to face massive risks if they use PayPal Credit or PayPal’s BNPL product as a form of student loan, and that PayPal itself faces a growing lack of credibility.
Background: Shadow Student Debt
Coverage of America’s student debt crisis has traditionally focused on the $1.75 trillion balance of student loans currently weighing down 45 million borrowers nationwide. However, the SBPC has long warned that an opaque and lightly regulated “shadow” student debt market is also putting borrowers at risk. Consisting of a wide range of products including personal loans, lines of open-ended revolving credit, Income Share Agreements, unpaid balances owed directly to schools, and several other products used for education financing, shadow student debt has become a linchpin in the business models of some of the most predatory schools in the for-profit college sector. With the high fees, harsh contractual terms, and abusive collections practices that typify shadow student debt, the growth of this dark market has come directly at students’ expense. And in a disproportionate share of cases, the borrowers this industry targets are Black and Latino students, women, low-income people, and/or students at for-profit colleges.
The present findings underscore that a growing set of companies see fortunes to be made through the student debt crisis, and that the practices that the SBPC and its partners pointed to in their 2020 letter to PayPal were only an early indication of now-worsening risks in the use of point-of-sale credit as a form of shadow student debt. It is long past due for policymakers and law enforcement to use the tools already at their disposal to hold predatory companies accountable and protect borrowers.
The Student Borrower Protection Center is a nonprofit organization focused on alleviating the burden of student debt for millions of Americans. The SBPC engages in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance economic opportunity for the next generation of students.