College Students Turning to Payday Loans To Pay for College Expenses
Inside Subprime: Aug 15, 2018
By Ben Moore
Payday loans, otherwise known as cash advances, have become a go-to for college students looking for fast cash. They have become so popular that now one in three college students will take out a payday loan and put themselves into a risk of the debt trap so many who take out payday loans fall into. The national average for payday loans is at an all time high of 400 percent, and most payday loan borrowers end up taking out subsequent loans to pay off the first. But because of how accessible they are (all that is needed to secure a payday loan is a valid ID, proof of income, and a bank account), they are only growing in popularity. The US is now home to over 23,000 payday lenders, which is double the amount of McDonald’s restaurants in the country.
The payday loan industry is now a $9 billion business, and borrowing a payday loan is more mainstream than many seem to realize, especially among young adults. CNBC Make It recently completed a survey of 3,700 Americans and learned that 40 percent of 18 to 21 year olds have contemplated borrowing for a payday lender. 1 in 10 went on to say they considered taking out a payday loan to cover their college tuition. With college students now completely maxing out the limit set for federal loans and taking out additional private loans, it is clear why payday loans have become so enticing. Most college students are considered “credit invisible”, meaning there is not enough data to calculate a credit score, so bank loans and credit cards end up not being an option for many students.
Since so many college students are turning to payday loans to fund college expenses, many are finding it difficult to pay off the loans without taking out a subsequent loan. The Consumer Financial Protection Bureau discovered that one in every four payday loans end up being re-borrowed nine times or more, and that it could take up to five months to pay off the loans with an additional $520 in fees. Austin Wilson, a student at University of Kansas, understands that “payday loans are traps” but still uses them as a way to get cash for college expenses he couldn’t otherwise afford. For college students that fall behind in their loan payments, the consequences can become detrimental. Many payday lenders require full access to the borrower’s checking accounts as a condition of the loan, and lenders can attempt to recover the money they are due by taking it directly from the checking account. This in turn could create expensive overdraft fees for the borrower as well, damaging their credit. Lisa Stifler, the deputy director of state policy for the Center for Responsible Lending understands the great risks college students take on when borrowing from a payday lender, recognizing they “are dangerous and unaffordable for everyone” but calls “borrowers who are just starting out or who are struggling financially”, such as a college student, as the “most vulnerable.”