Do College Students Use Payday Loans?

Inside Subprime: Dec 24, 2018

By Aubrey Sitler 

The financial struggles that many college students face can add up fast. Between mounting student loan debt and lack of time to devote to jobs that generate enough income to cover the cost of living, it’s a lot to manage, especially while trying to concentrate on class requirements and deadlines. And when work-study jobs aren’t quite enough to make ends meet, or when the semester’s student loan disbursement schedule doesn’t quite align with when bills are due, it is not surprising that some college students might be tempted to take out a short-term, no-credit-check loan or cash advance–and it is less surprising that predatory payday lenders would let them.

Austin Wilson, a 21-year-old senior at the University of Kansas, experienced this kind of predicament first-hand. After having spent what little emergency savings he had on car repairs earlier in the year, Wilson had just $100 to his name and $400 in income every other week. He had few options when figuring out how to pay his apartment’s $600 rent on August 1. He knew his student loan check wouldn’t come in until August 15, and the bank’s minimum of $3,000 for a personal loan felt irresponsible, given that he had over $30,000 in student debt already and no collateral or assets to offer them.

Even knowing that payday loans were not in his best interest, Wilson was at a loss for a better alternative, so he considered taking out a payday loan in Kansas. He said, “I know payday loans are traps. But I figured if I could stay on top of it, I know I’m going to get this money, so I just need to pay my rent.”

And he’s right. College students are particularly vulnerable payday loan borrowers. Since many students have low incomes and minimal assets, they can easily end up in debt traps if they fail to pay the loan back quickly, where they owe far more money to payday lenders than they have the potential to make immediately. This vicious cycle is how payday lenders make money.

According to the Consumer Financial Protection Bureau, nearly 1 of every 4 payday loans is re-borrowed at least 9 times, leaving borrowers to pay way more in fees and penalties than they ever received in credit. A Pew Charitable Trusts report also found that the average borrower takes out 8 payday loans of $375 each per year, takes 5 months to pay them back, and ends up paying $520 on interest and other finance charges. These remarkably high fees make these predatory loans terribly risky for college students.

But how many young people are actually using payday loans to get by?

The results of a recent survey on payday lending that CNBC Make It conducted with Morning Consult indicate that a significant proportion of college-aged students are at least aware of, if not also participating in, the payday loan market. This survey, which included over 3,700 adults, showed that more than 1 in 3 (38 percent) Generation Zers (that is, people aged 18-21) had “strongly considered” taking out a payday loan, and 11 percent of GenZers considered taking out a payday loan specifically for costs associated with college. Furthermore, an alarming 8 percent of people 18-21 had taken out a payday loan in the past 2 years.

Fortunately, in Wilson’s case, a friend came through with an interest-free loan for the two-week gap between when his rent was due and his loans came in. For others who don’t have friends, family, or other means to make it through financial dilemmas in a pinch, there are better options out there for college students, sometimes even through emergency funds available through their colleges.

For more information on payday loans, scams, and cash advances and check out our state financial guides including CaliforniaIllinoisTexasFlorida and more.