- The Student Borrower Protection Center released an investigation on private student-loan financing.
- It found "Buy Now, Pay Later" loans can steer students in the for-profit sphere deep into debt.
- Since they are not federal, BNPL lacks oversight and often does not disclose risks to borrowers.
The for-profit education sphere has been under scrutiny for decades over accusations of bad behavior and misleading students into taking on debt — and a new investigation highlighted the major risks with the loans many of those schools offer.
The Student Borrower Protection Center (SBPC) released a report on Thursday that found over 100 for-profit schools issue "dangerous" loan financing options to students that are lightly-regulated and are not in the best interest of the borrower.
The report highlighted "Buy Now, Pay Later" (BNPL) loans in particular, which allow borrowers to split loan repayments into a series of installments, but have left many to face "huge and unexpected fees, see damage to their credit, be left with no protections in the event of fraud, lose ability to seek justice in the courts in the event of a dispute, and more," according to the report.
BNPL loans fall under what the report described as "shadow student debt" — a term for the broad set of "risky" loans available outside the typical private student loan market.
"Today's report exposes yet another industry bent on making a buck through the student debt crisis," SBPC Director of Research & Investigations Ben Kaufman said. "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."
As Insider previously reported, BNPL loans have grown in popularity over recent years — more than 45 million Americans are using them — prompting the Consumer Financial Protection Bureau (CFPB) to open an inquiry on firms that hand out those loans given their unregulated nature. And, as the Student Borrower Protection Center's report found, regulation is needed. Many students who attend for-profit schools take out BNPL loans with the promise of successful employment post-graduation, but despite the 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."
Here are other main findings from the SBPC's investigation:
- BNPL options are available as a student loan at more than 50 "apparently unaccredited and/or unregulated for-profit schools," leading to significant lack of oversight over the financing.
- BNPL companies are especially active in for-profit training bootcamps, usually for tech jobs, that have historically misled students into taking on debt with few career prospects.
- Despite PayPal claiming in 2020 it would take action to rein in its private loan financing products, schools can use PayPal services as a type of loan they offer, and they are continuing to offer the company's BNPL loan as a student loan.
Law360 reported on Wednesday that PayPal is facing a lawsuit after consumers told a federal court the company did not make them aware of the "true risks" of its BNPL service.
The government has started cracking down on risky student-loan financing
PayPal and Afterpay are most commonly known for ecommerce sales, but they also offer a service that schools can use to set up BNPL loans for students.
As the SBPC highlighted, the risks with BNPL can be dire. Not only are those lenders not required to offer an account statement disclosing payments, which can make borrowers confused about what they owe, but late fees can be as high as $25 for one late payment. Afterpay reported it sourced 20% of its overall yearly revenue from late fees alone, per the National Consumer Law Center.
Lawmakers are aware of these risks, and six Democratic senators urged the CFPB to increase oversight and ensure transparency over BNPL products in December.
"[BNPL] are not generally subject to federal supervision that can spot unfair, deceptive, or abusive practices or other violations of federal consumer protection laws," the lawmakers' letter said. "Consumers may be unaware of these regulatory gaps and may be erroneously led to believe that credit obtained from a BNPL provider comes with protections that are similar to those for credit cards."
On Wednesday, the CFPB published a blog post reminding colleges that advertise private student loans that they must disclose all costs and risks associated with the financing, as required by the Higher Education Act.
"Without guardrails, these financial incentives can create conflicts of interest that may drive students to use financial products—branded by trusted college logos—that have high or unusual fees and fewer consumer protections than other widely available products," Rich Williams, chief of staff of the Office of Postsecondary Education, wrote. "Expensive financial products can leave many vulnerable students deeper in debt, and unexpected fees can threaten their path toward graduation."