PayPal Credit, in partnership with Synchrony Bank, offers education financing to students attending more than 150 career training schools, but public interest groups say the double-digit interest, late fees and collection practices are predatory, and they want greater oversight from federal regulators.
This week, the Student Borrower Protection Center, Americans for Financial Reform, Student Debt Crisis and Allied Progress sent a joint letter to the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency, calling on the agencies to investigate PayPal and Synchrony’s business practices. The groups say the financing options the companies offer can leave borrowers in significant distress with few protections. They also raised concerns that many of the institutions accepting the form of payment are unaccredited and largely unsupervised.
PayPal Credit, an arm of the payment processor, offers six months of deferred interest for students using the line of credit for educational expenses. If the balance is not paid off within that time, 25% interest is retroactively charged from the date of origination and added to the balance of the debt. Advocates say the terms are not transparent and worry that a student whose program lasts longer than six months could trigger the provision before earning enough to pay off the balance.
While the interest PayPal charges is comparable to some credit cards, the advocacy groups say it is four times higher than the most expensive federal student loan. The company also charges late fees of up to $39 per missed payment, but most private student lenders have no such fees, the groups say. PayPal also reserves the right to request immediate full payment from the estate of a deceased borrower, a collection practice the groups call extremely aggressive.
“The product that PayPal is offering for people to get retraining or try to enter a new field is predatory,” said Seth Frotman, executive director of the Student Borrower Protection Center (SBPC). “It’s high cost, high risk and funding dubious programs and schools. It’s a recipe for disaster for people just trying to have a better life.”
In a separate letter to PayPal, SBPC and the other groups urged the company to review its business practices and the schools promoting its credit product. They noted that the product is being promoted by unaccredited programs that in some cases offer courses in hypnosis, essential oils or swordsmanship.
Traditional student lenders usually work with institutions whose programs receive the seal of approval from an accreditation body, vouching for the value of the credential. The public interest groups say it’s unclear what criteria, if any, PayPal uses to vet the schools or programs promoting its product.
PayPal spokesman Joseph Gallo said the company is taking the claims in the letter “very seriously.” He said the company “adheres to all state and federal regulations to ensure clear, easy to understand information about credit products.” PayPal does not directly market to for-profit schools and has “no direct relationship” to the career training schools noted in the letter, he said.
“If an organization is found to be using inaccurate or misleading messaging or characterization about PayPal Credit products without our prior knowledge or consent, we will quickly move to terminate the use of our services,” Gallo said in a statement.
He said PayPal has already begun taking action against some of the schools mentioned in the letter that have been found to be using inaccurate or misleading messaging.
Synchrony, which issues the line of credit from PayPal, declined to comment. The Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency, a banking regulator, did not immediately respond to request for comment.
Frotman, a former senior official at CFPB , and his organization have been investigating specialty finance companies that lend to students attending for-profit colleges. The organization released a report last month on the use of what they call “shadow” student lending, a form of lending that operates outside of traditional education financing. In their investigation, PayPal Credit was frequently touted by career schools as an option for students to finance their education.
Frotman said he hopes the findings serve as a wake-up call to regulators, especially as displaced workers look to sharpen their skills or learn new trades in the wake of the economic downturn.
“With millions of Americans out of work . . . they may turn to people promising a higher-paying job or a new career, and often it’s fraudulent,” Frotman said. “PayPal seems all too willing to profit off their plight with exceedingly high-cost products for the most vulnerable borrowers.”