The College Student’s Guide to Avoiding Payday Loans

Inside Subprime: Nov 28, 2018

By Lindsay Frankel

Most college students are on such a tight budget that any small setback could be disastrous. They also often lack established credit history, which can make it difficult to take out a loan from a bank or credit union. The lack of alternative options has led roughly 1 in 3 college-age Americans to consider taking out a high-cost payday loan. And eight percent of Americans ages 18-21 have taken out a payday loan in the past two years, according to a survey by CNBC Make It and Morning Consult.

Lisa Stifler, deputy director of state policy for the Center for Responsible Lending, told CNBC Make It, “Payday loans are dangerous and unaffordable for everyone, but borrowers who are just starting out or who are struggling financially — they’re the most vulnerable.”

What are payday loans?

Payday loans are small-dollar, short term loans that don’t require a credit check and use the borrower’s future paycheck as collateral. You only need to show identification, proof of income, and proof of a bank account to get a loan from a payday lender. Typically, you’ll  write a postdated check, often aligned with your next pay period, which the lender can cash if you haven’t paid back the loan on time. These risky loans are often marketed as a way to gain quick access to much-needed cash, but they can quickly snowball into a long-term debt problem.

Why should college students avoid payday loans?

It can be difficult for college students to gain access to reliable income, or to secure additional income in the case of an emergency. Without enough cash to make ends meet, the added annual interest rates on payday loans, which carry an average APR of 400 percent, can make it difficult for college students to keep up with the payments. Payday loan providers earn more revenue when borrowers rollover their loans, which is a common occurrence. Nearly half of payday loan borrowers rollover their loans nine times within 12 months, according to a study by the Consumer Financial Protection Bureau.

While some states place interest rate caps or other limits on payday loans by law, other states do little to curb the problem. Payday loans in Texas are almost completely unregulated at the state level, and it costs borrowers an average of $701 just to borrow $300 for five months, according to 2016 data from Pew Charitable Trusts. While payday loans may seem like an easy solution to a financial emergency, college students should seek alternatives, and should budget to avoid the need for payday loans to cover recurring expenses.

How can college students avoid payday loans?

College students should build healthy credit early on in order to gain access to more affordable loans. Most college students use cash or a debit card for purchases, but opening a credit card is a great way to establish credit history. If you can, ask a parent or relative to cosign on a credit card and always make your payments on time.

Budgeting, saving, and planning ahead are also key ways to avoid payday loans. Check out our article on How to Save Money as a Broke College Student, which includes tips such as renting textbooks and utilizing student discounts.

Some employers, including Walmart, offer solutions for accessing your income prior to payday, and others may consider a one-time advance in the case of an emergency. You can also talk to banks or credit unions, or consider a lower-cost installment loan that will help build your credit. Payday loans should never be used, not by the financially vulnerable, and especially not by college students beginning their financial lives.

For more information on scams, cash advances and title loans, check out all of our state-by-state Financial Resource Guides.

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