Consumer groups take PayPal to task over student loan credit line
Groups say hefty interest charges can leave borrowers in ‘financial distress’
Students at some for-profit career schools could end up paying hefty interest charges when using a credit line offered by PayPal, a group of consumer watchdog groups warned last week.
More than 150 small career schools and technical programs, most of which aren’t accredited and are loosely regulated, offer students the option to pay tuition using PayPal Credit, a digital credit line marketed by PayPal Holdings and issued by Synchrony Bank, the groups found.
The line, similar to a credit card but without the plastic, has an interest rate of about 24 percent and is typically promoted with a six-month no-interest period. Borrowers are charged interest retroactively if the entire balance isn’t paid by the end of the promotion, a feature known as “deferred interest,” the groups said in a letter to federal regulators.
PayPal mainly promotes the credit account for shopping online but also makes it available to schools offering short-term certificate programs that are generally ineligible to offer lower-cost federal student loans, according to the groups. In some examples they cited, a disclosure stating that the card carries no interest “if paid in full in six months” appears prominently but is hard to find on others.
In addition to a doubledigit interest rate, PayPal Credit charges late fees of up to $40 per missed payment. PayPal also follows “aggressive” collection practices, the groups found.
“All of these facets create a very questionable and predatory financing product,” said Seth Frotman, executive director of the Student Borrower Protection Center, a nonprofit advocacy group started by former members of the federal Consumer Financial Protection Bureau staff. The credit line illustrates an increasing use of “shadow” student loan debt, he said — funds borrowed for education outside traditional student lending options.
In a letter Thursday, the groups urged the consumer bureau and the federal Office of the Comptroller of the Currency, a bank regulator, to investigate the use of PayPal Credit. In a separate letter to PayPal, they called on the company to stop offering the payment option for for-profit schools, saying it “can leave borrowers in significant financial distress with few protections.” In addition to the borrower protection center, Allied Progress, Student Debt Crisis and the Americans for Financial Reform Education Fund signed the letters.
PayPal said in an email that it took the claims in the letter “very seriously.” PayPal, the email said, “adheres to all state and federal regulations to ensure clear, easy to understand information about credit products.” The company does not market PayPal Credit directly to for-profit educational institutions, it said, and has “no direct relationship” with those cited in the letter.
“If an organization is found to be using inaccurate or misleading messaging or characterization about PayPal Credit products without our prior knowledge or consent,” the statement said, “we will quickly move to terminate the use of our services.”
On Friday, PayPal said it had begun reviewing the list included in the letter and “taking actions if our products are misrepresented or characterized incorrectly.” As a result, some schools cited in the letter can no longer accept PayPal Credit as payment.
A Synchrony spokeswoman said Friday that the company had not been notified of the letter by federal regulators and declined to comment.
A representative of the comptroller’s office said in an email, “The groups did reach out to us today, but we do not comment on specific bank matters and products.” The consumer bureau declined to comment.
As Americans look to retrain and learn new skills to find jobs amid the pandemic-induced economic slowdown, they are again turning to for-profit schools, as they did during the 2008 recession.
Deferred-interest financing is particularly risky for “unproven” educational programs, Frotman said, which may be expensive in relation to the potential salaries students can earn.
Schools accepting PayPal Credit as a payment option, the groups found, include programs offering certification as home inspectors, makeup artists, flight attendants or bodyguards. Others offer instruction in hypnosis, aromatherapy and flower arranging.
Here are some questions and answers about paying for certificate programs:
Q: Isn’t an interest-free payment period a good thing?
A: If you are certain that you can repay the full amount within the promotional period, it may make sense. But people often overestimate their ability to pay and are hit with extra debt they can’t afford. Deferred interest charges may add a “shocking” lump sum to the borrower’s credit card bill, according to the website of the Experian credit bureau.
A 2015 report by the Consumer Financial Protection Bureau found that one-quarter of people who took advantage of six- and 12-month deferred interest promotions failed to pay off their balance before the offer expired.
A true 0 percent promotional offer — which means no interest is charged for a promotional period, and then interest is charged on any remaining balance after the promotion ends — is potentially a better option, but such offers typically require toptier credit scores.
Q: How have financial regulators viewed deferred interest credit offers?
A: “Deferred interest” promotions have been used most often by store credit cards and have been discouraged by the Consumer Financial Protection Bureau in the past. In 2013, the bureau ordered CareCredit, a medical credit card then issued by GE Capital Retail Bank — now Synchrony — to refund $34 million to consumers who had signed up for deferred interest offers thinking the card was interest-free.
Q: How should I evaluate a technical or career program?
A: Students should vet a program before borrowing to fund educational costs. “Any loan for a program of unknown quality is a potential problem,” said Toby Merrill, director of the Project on Predatory Student Lending at Harvard Law School’s Legal Services Center.
Look for a school that is licensed by the state where it operates and is accredited by an independent authority (such as one on the list of accreditors recognized by the federal Education Department).
“We believe accreditation is an important test of the academic quality of the program,” said Steve Gunderson, president and CEO of Career Education Colleges & Universities, a trade group representing for-profit colleges.
Even if an unaccredited program is reputable, he said, any credit you earn can’t be transferred to a two- or fouryear institution as a building block to a higher degree.
Does the school offer federal student aid? No loan is risk-free, but federal loans generally offer the cheapest rates and have borrower protections that other types of debt lack, said Quinn Martin, a lawyer with the consumer protection division at the Federal Trade Commission.
It can be difficult to independently verify a school’s claims about the rate of employment among its graduates. Try to talk to former students, and to employers who have hired them, about their experience, Martin said.
“My general advice is, don’t take the school’s word for it,” he said.
You can also check with the state licensing office or attorney general’s office to see if excessive complaints have been made about a school or program. The FTC website offers additional advice.