Is 'learn now, pay later' just another student debt trap?

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.

Buy now, pay later financing has become a go-to payment method at most major retailers for everything from clothing and cosmetics to computers and patio furniture. Now, it’s gaining traction for an even bigger expense: higher education.

Buy now, pay later is an appealing, flexible financing concept, but customers who can’t keep up with payments can end up with late charges or interest they can’t afford. Just as buy now, pay later 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,” says Ben Kaufman, director of research and investigations at the Student Borrower Protection Center, a nonprofit organization that advocates for student loan borrowers. “Is there ever a worse place for that to be than higher education when there isn’t even collateral underlying the product?”

What can go wrong

Buy now, pay later 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. The worst actors have been accused of deceiving students and predatory lending.

Kaufman says 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 Student Borrower Protection 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.

Kaufman argues there are too few safeguards against shady schools.

“This is not a small thing; this is people taking out thousands of dollars of buy now, pay later credit that more likely than not is not going to deliver what was advertised,” Kaufman says.

The lack of regulation in both for-profit and buy now, pay later spaces 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,” says Jaylon Herbin, outreach and policy manager at the Center for Responsible Lending.

Feds looking

The federal Consumer Financial Protection Bureau is also concerned. In a Dec. 16, 2021, news release, the bureau stated that some buy now, pay later companies might not be “adequately evaluating what consumer protection laws apply to their products.” The bureau has since been collecting information about the risks of buy now, pay later and is expected to publish its findings this year.

A March 2022 report by the Student Borrower Protection Center found buy now, pay later options offered at more than 50 unaccredited and/or unregulated for-profit schools. The companies named in the report included some major players in the buy now, pay later market.

Affirm, is focused primarily on retail, but it partners with boot camps like Udacity. Udacity has a positive reputation among consumers, but as the Student Borrower Protection Center points out, Udacity doesn’t provide signifiers that its programs will lead to success, such as historic student outcomes or job placement stats.

If you are looking for training with flexible classes, your local community college should be your go-to option — their programs are typically eligible for federal financial aid, including free Pell Grants and traditional student loans.

If you must use buy now, pay later for school, 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.