Consumer Groups Take PayPal to Task Over Student Loan Credit Line

Students at some for-profit career schools could find themselves paying hefty interest charges when using a credit line offered by PayPal, a group of consumer watchdog groups warned this 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, currently 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 consumer groups. In some examples cited by the groups, 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.

“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 on 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.

A PayPal spokesperson said in an email that the company took the claims in the letter “very seriously.” PayPal, it 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.”

A Synchrony spokeswoman said on 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, Mr. Frotman said, which may be quite 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.

In one example calculated by the consumer groups, a student pursuing a career through a home inspection school who financed its $6,800 tuition through PayPal Credit, and then took five years to pay off the debt, would pay $13,634 over the life of the loan — twice the amount borrowed. The borrower would owe $227 monthly toward the loan. (The example used a 25.49 percent interest rate cited on PayPal’s website). Salaries for home inspectors average about $35,000 nationally, according to the employment website Glassdoor.

If a borrower defaults, PayPal Credit may charge the borrower for expenses associated with collection of the debt. And if a borrower dies, it may “request payment of the full amount due right away” from the borrower’s estate. (In contrast, federal student loans are discharged upon a borrower’s death).

Here are some questions and answers about paying for certificate programs:

Isn’t an interest-free payment period a good thing?

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 a 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 zero-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 top-tier credit scores.

How have financial regulators viewed deferred-interest credit offers?

“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 Bank — to refund $34 million to consumers who had signed up for deferred-interest offers thinking the card was interest free.

How should I evaluate a technical or career program?

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 chief executive 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 four-year institution as a building block to a higher degree.

Note that in some cases, particularly in the health care field, individual programs of study — rather than the overall institution — must have specific industry accreditations as well, said Alisha Hyslop, senior director of public policy at the Association for Career & Technical Education, a trade group that works primarily with nonprofit schools.

Check if the program has qualified instructors, Ms. Hyslop advised, and whether it has relationships with employers, such as internships, which can help with job placement. The association offers a full list of criteria for quality programs.

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, Mr. 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 F.T.C. website offers additional advice.