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.
This has become a go-to payment method at most major retailers for everything from clothing and cosmetics to computers and furniture. Now, it's gaining traction for an even bigger expense: higher education.
Though it may look like an appealing, flexible financing concept, it 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,'' said Ben Kaufman, director of research and investigations at the Student Borrower Protection Center. "Is there ever a worse place for that to be than higher education when there isn't even collateral underlying the product?''
Such 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 said the 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 center 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.
He argued that 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 credit that more likely than not is not going to deliver what was advertised,'' he said.
The lack of regulation 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,'' said Jaylon Herbin, outreach and policy manager at the Center for Responsible Lending.
A March 2022 report by the Student Borrower Protection Center , which characterized "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.
This is how it works with one major player.
Though focused primarily on retail, Affirm partners with boot camps like Udacity. Affirm can be used to pay for "nanodegrees'' at Udacity, which typically cost less than US$2,000 (HK$15,600) and are completed within six months..
Borrowers can then pay off the loan in three, six or 12 months at rates from 0 to 30 percent.
Say one borrower takes on US$2,000 in buy now, pay later debt and plans to repay it in three months. Their credit qualifies for a 0 percent interest rate, meaning they'll pay roughly US$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 percent interest rate. That means over six months, they'll pay US$358 per month and US$2,148 total.
In either scenario, you would be expected to repay the loan before any likely potential payoff from your nanodegree.
"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.
If you are looking for training with flexible classes, local community college should be your go-to option - their programs are typically eligible for federal financial aid.
In case you must use "buy now, pay later," 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. 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. 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.
Nerdwallet
