The Buy Now, Pay Later (BNLP) transaction is simple: buyers are offered an installment loan at the point of purchase, spreading the cost of the product over several payments. They are often available without a credit check.
BNLP 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’s gaining traction for an even bigger expense: higher education.
BNLP is an attractive and flexible financing concept, but customers who cannot keep up with their payments may end up with late fees or interest they cannot afford. Just as the BNLP can be a debt trap for the wrong buyer, education and consumer advocates fear that “Learn now, pay later” could be a similar trap for students, and often with much higher stakes. students.
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 BNLP to finance the school
BNLP funding options are typically offered by schools that are not eligible for federal financial aid, such as short-term certificate programs (think truck driving and cosmetology schools) and boot camps coding 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 BNLP’s funding model “fits into a long history of makeshift operators using increasingly toxic forms of credit to support what are essentially scams.” The Student Borrower Protection Center found BNLP 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 BNLP funding, 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 and BNLP spaces also has 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 concerned. In a December 16, 2021 press release, the bureau said some BNLP companies may not “properly assess the consumer protection laws that apply to their products.” The office has since been collecting information on the risks of the BNLP and is expected to release its findings this year.
What BNLP companies offer students
A March 2022 report by the Student Borrower Protection Center, which referred to BNLP as “phantom” student debt, found BNLP options offered at more than 50 unaccredited and/or unregulated for-profit schools. Companies cited in the report included some major players in the BNLP 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 BNLP companies, is primarily focused 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 zero to 30%. Interest is not compounded.
Suppose a borrower incurs a debt of $2,000 from BNPL and expects to repay it in three months. Their credit qualifies for a zero percent interest rate, which means they’ll pay about $666 a 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.
BNPL does not 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.
Assessment of 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 an BNPL plan. .
If you have to use BNPL for school, the rule of thumb 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 one focused on short-term job training, is usually employment and increased income. While student loans typically require borrowers to begin making payments six months after leaving school, BNLP timelines are generally much shorter.
- The total cost. What makes BNLP 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.
- Inability to build credit. A traditional student loan is added to your overall credit profile, but BNLP BNLP payments are generally not reported to credit bureaus. As the previous Affirm example shows, this can happen, but it’s not common practice.
By Anna Helhoski of NerdWallet
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