Is “Learn Now, Pay Later” Just Another Student Debt Trap?

Jhe “buy now, pay laterThe transaction is simple: buyers are offered a point-of-purchase installment loan, spreading the cost of the product over multiple payments. They are often available without a credit check.

Buy now, pay later Financing has become a go-to payment method at most major retailers for everything from clothing and cosmetics to computers and patio furniture. Now it is gaining ground for an even bigger expense: higher education.

Buy now, pay later is an attractive and flexible financing concept, but customers who can’t keep up with payments can end up with late fees or interest they can’t afford. Just as buy now, pay later can be a debt trap for the wrong buyer, education and consumer advocates worry that “learn now, pay later” could be a similar trap for students – and often with much higher stakes.

A fundamental question: you can’t give back your study hours like you would a dress or a laptop.

“There’s this deep, fundamental incompatibility with buy now, pay later, and education funding,” says Ben Kaufman, director of research and investigations at the Student Borrower Protection Center, a nonprofit that advocates for student borrowers. “Is there ever a worse place than higher education when there isn’t even an underlying product warranty?”

The problem with buy now, pay later to fund school

Buy now, pay later Funding options are usually offered by schools that are not eligible for federal financial aid, such as short-term certificate programs (think truck driving and cosmetology schools) and coding boot camps offered by for-profit institutions. Student outcomes vary widely across the for-profit industry, and the worst performers have been accused of deceiving students and lending on predatory terms.

Kaufman says the buy-now-pay-later funding model “fits into a long history of stealth operators using increasingly toxic forms of credit to support what are essentially scams.” The Student Loan Protection Center found buy now, pay later plans offered at schools ranging from unlicensed computer schools to teaching wilderness survival to training in Reiki, a form of alternative medicine.

Kaufman argues that there are too few safeguards to stop shady schools from offering buy-now, pay-later financing, and that can potentially hurt students.

“It’s no small thing; these are people who buy thousands now, pay credit later that most likely won’t deliver what was advertised,” Kaufman says.

The lack of regulation in for-profit spaces and buy now, pay later also puts other consumer watchdogs on alert.

“Many for-profit institutions use these products to entice borrowers to participate, but they don’t educate them about the risks involved,” says Jaylon Herbin, head of outreach and policy at the Center for Responsible Lending.

The Federal Consumer Financial Protection Bureau is also involved. In a Dec. 16, 2021, press release, the bureau said some buy-now-pay-later companies may not “properly assess the consumer protection laws that apply to their products.” The bureau has been collecting information on the risks of buy now, pay later and is expected to release its findings this year.

What do companies offer students to buy now, pay later?

A March 2022 report from the Student Borrower Protection Center, which called buy now, pay later “fictitious” student debt, found buy now, pay later options offered at more than 50 nonaccredited for-profit schools and/or unregulated. Companies named in the report included some major players in the buy-it-now and pay-later market: Affirm, Afterpay, Klarna, PayPal, Sezzle, Shop Pay, Uplift and Zip (formerly QuadPay).

That’s how it works with one of the major players. Affirm, like most buy now, pay later, focuses primarily on retail, but partners with boot camps like Udacity. Udacity has a positive reputation with consumers, but as the Student Loan Protection Center points out, Udacity does not provide indicators that its programs will lead to success, such as historical student scores or placement statistics.

Affirm can be used to pay for “nanodegrees” at Udacity, which typically cost less than $2,000 and are completed within six months.

Borrowers can then repay the Affirm loan in three, six or 12 months at rates ranging from 0% to 30%. Interest is not compounded.

Suppose a borrower buys $2,000 now, pays his debt later, and expects to pay it back in three months. Their credit qualifies for 0% interest, which means they’ll pay about $666 per month.

Another borrower takes the same amount and expects to pay it back in six months. But their credit history is far from excellent and they will have an interest rate of 25%. This means that over six months they will pay $358 per month and $2,148 in total.

In either case, you would be expected to repay the loan before any likely potential gain from your nanodegree.

Affirm says consumers must apply each time they buy something, and the company only approves credit “which we believe can and will be refunded.” When reporting a borrower to a credit bureau, Affirm includes both positive and overdue payments.

Buy now, pay later doesn’t always look like this. It can be even worse with a lender who charges compound interest or has shorter repayment terms. And it is in the best of cases that the program bears fruit.

What Consumers Can Do to Evaluate Financing Options

If you’re looking for an education with flexible coursework, your local community college should be your go-to — their programs are typically eligible for federal financial aid, including free Pell Grants and traditional student loans.

Consumers should always evaluate for-profit, short-term accrediting schools with respect to placement, graduation rates, accreditation, and cost. This information is not always available, but it is best to inquire. If you are determined to attend a for-profit college, short-term credentialing school, or boot camp, there are very few financing options available: a loan from the school, a credit card , a personal loan or buy it now, pay later.

If you have to buy now, pay later for school, the general rule is: if you don’t have room in your budget now to make the payments, it’s not worth it.

Some of the risks to consider include:

  • Reimbursement deadline. The promise of an education program, especially focused on short-term vocational training, is usually a job and an increase in income. While student loans typically require borrowers to start making payments six months after leaving school, buy now, pay later, the timelines are usually much shorter.
  • The total cost. What makes buy now, pay later plans appealing is also what makes them dangerous: It’s easy to overspend on a large purchase because split payments seem more affordable. Depending on what you qualify for, high interest rates can make the amount you pay over time even more expensive.
  • An inability to build up credit. A traditional student loan is added to your overall credit profile, but buy now, pay later payments are generally not reported to credit bureaus. As the previous Affirm example shows, this can happen, but it’s not common practice.

This article was written by NerdWallet and was originally published by The Associated Press.

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