Is 'learn now, pay later' just another student debt trap?

The “ buy now, pay later ” transaction is simple: Shoppers are offered an installment loan at the point of purchase, spreading the cost of the product across several payments. They're 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's gaining traction for an even bigger expense: higher education.

Buy now, pay later is an appealing, flexible financing concept, but customers who can't keep up with payments can end up with late charges or interest they can't afford.

Just as buy now, pay later can be a debt trap for the wrong shopper, education and consumer advocates fear that “learn now, pay later” could be a similar pitfall for students — and often with much higher stakes.

One fundamental issue: You can't return your hours of education like you can a dress or a laptop.

“There's this deep and fundamental incompatibility with buy now, pay later and education financing,” says Ben Kaufman, director of research and investigations at the Student Borrower Protection Centre, a nonprofit organisation that advocates for student loan borrowers.

“Is there ever a worse place for that to be than higher education when there isn't even collateral underlying the product?”

Read | Buy now, pay later: Apple will now lend you money to keep you spending and expand its empire

The trouble with 'Buy now, pay later' to finance school

Buy now, pay later financing options are typically offered by schools that don't qualify 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 in the for-profit industry, and the worst actors have been accused of deceiving students and predatory lending.

Kaufman says the buy now, pay later financing model “fits within a long history of fly-by-night operators using ever-more toxic forms of credit to prop up what are essentially scams”.

The Student Borrower Protection Centre found buy now, pay later plans offered at schools ranging from unlicensed computing schools to wilderness survival instruction to training in Reiki, a form of alternative medicine.

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

“This is not a small thing; this is people taking out thousands of dollars of buy now, pay later credit that more likely than not is not going to deliver what was advertised,” Kaufman says.

The lack of regulation in both for-profit and buy now, pay later spaces has other consumer watchdogs on alert as well.

“A lot of for-profit institutions are using these products to attract the borrowers to attend, but they're not educating them on what the risks are for it,” says Jaylon Herbin, outreach and policy manager at the Centre for Responsible Lending.

The federal Consumer Financial Protection Bureau is also concerned. In a December 16, 2021, news release, the bureau stated that some buy now, pay later companies might not be “adequately evaluating what consumer protection laws apply to their products”.

The bureau has since been collecting information about the risks of buy now, pay later and is expected to publish its findings this year.

Also read: 'Buy Now, Pay Later' business model faces test as rates rise

What 'Buy now, pay later' companies are offering students

A March 2022 report by the Student Borrower Protection Centre, which characterised buy now, pay later as “shadow” student debt, found buy now, pay later options offered at more than 50 unaccredited and/or unregulated for-profit schools.

The companies named in the report included some major players in the buy now, pay later market: Affirm, Afterpay, Klarna, PayPal, Sezzle, Shop Pay, Uplift and Zip (formerly QuadPay).

This is how it works with one of the major players. Affirm, as most buy now, pay later companies, is focused primarily on retail, but it partners with boot camps like Udacity.

Udacity has a positive reputation among consumers, but as the Student Borrower Protection Centre points out, Udacity doesn't provide signifiers that its programmes will lead to success, such as historic student outcomes or job placement stats.

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 pay off the Affirm loan in three, six or 12 months at rates from 0 per cent to 30 per cent. Interest does not compound.

Say one borrower takes on $2,000 in buy now, pay later debt and plans to repay it in three months. Their credit qualifies for a 0 per cent interest rate, meaning they'll pay roughly $666 per month.

Another borrower takes out the same amount and plans to repay it in six months. But their credit history is less than stellar and they'll have a 25 per cent interest rate. That means over six months, they'll pay $358 per month and $2,148 total.

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

Affirm says consumers must apply each time they buy something and the company approves only credit “that we believe can and will be repaid”.

When it reports a borrower to a credit bureau, Affirm includes both positive and delinquent payments.

Buy now, pay later doesn't always look like this. It can be even worse with a lender that charges compound interest or has shorter repayment terms. And that's in the best-case scenario where the program pays off.

What consumers can do to evaluate financing options

If you are looking for training with flexible classes, your local community college should be your go-to option — their programmes are typically eligible for federal financial aid, including free Pell Grants and traditional student loans.

Consumers should always evaluate for-profit and short-term credentialing schools regarding job placement, graduation rates, accreditation and cost.

This information is not always available, but it's best to inquire. If you're determined to attend a for-profit college, short-term credentialing school or boot camp, there are very few financing options available: a loan offered by the school, a credit card, a personal loan, or a buy now, pay later plan.

If you must use buy now, pay later for school, the rule of thumb is this: 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 timing of repayment.

The promise of an education programme, especially one focused on short-term career training, is usually a job and a boost in income. While student loans usually require borrowers to start making payments six months after leaving school, buy now, pay later timelines are typically much shorter.

The total cost. What makes buy now, pay later plans alluring is also what makes it hazardous: It's easy to overextend yourself on a large purchase because the broken-up 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 credit. A traditional student loan is added to your overall credit profile, but buy now, pay later payments aren't typically reported to the credit bureaus. As the earlier Affirm example shows, it can happen, but it's not common practice.