PayPal is fighting back after several consumer advocacy groups cited the payment provider for what they called "predatory financial practices."
In a joint letter to the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency, the consumer groups, including the Student Borrower Protection Center, Americans for Financial Reform, Student Debt Crisis and Allied Progress, said "PayPal Credit is currently providing its products as high-cost education financing options that can leave borrowers in significant distress."
PayPal Credit is the consumer lending arm of PayPal, and is offered by Synchrony Bank. It is essentially an unsecured line of credit, which generally comes with a higher interest rate than regular credit cards but allows access to up to $20,000, depending on your creditworthiness. Currently, PayPal Credit has an annual percentage rate of about 24%.
Students relying on financial products like this to pay for classes or other education expenses are charged rates that far exceed the most expensive federal student loans, the letter said.
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"It is more expensive than most credit cards and private student loans," said Mark Kantrowitz, publisher of SavingForCollege.com. "Frankly, it is a predatory financial product."
In fact, the interest rates on federal student loans are at a record low, with undergraduate Stafford loans down to 2.75%. The rates on private student loans vary but can be as low as 3.5% — they are typically higher than federal student loans and charge higher fees. Credit card rates stand near 16%, on average.
The letter included a list of more than 150 mostly unaccredited colleges and certificate programs that advertise PayPal Credit as a financing option for students. Many of these for-profit programs do not have access to federal student loans or private student loans, according to the consumer groups.
"We take the claims outlined in this letter very seriously," PayPal spokesman Joseph Gallo said in an email.
"PayPal does not market PayPal Credit directly to for-profit educational institutions or other associated entities and the company has no direct relationship with entities in question regarding PayPal Credit," he said.
"While PayPal claims that it does not market it to for-profit colleges, they are benefiting from the colleges' use of their product," Kantrowitz said.
At four-year private colleges, tuition and fees plus room and board averaged $49,870 in the 2019-20 school year; at four-year, in-state public colleges, it was $21,950, according to the College Board.
Citing concerns raised in an earlier report by the Student Borrower Protection Center, tapping other types of credit and debit — beyond federal and private student loans — to cover educational expenses is contributing to a growing problem of "shadow student debt," the consumer groups also said.
"In the shadow of the student loan market sits a hidden web of credit and debt taken on by students to pay for college," the report stated. "These high-cost, high-risk financial products are used to prop up predatory for-profit schools across the country."
"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," PayPal's Gallo said.
"We have already begun taking action against some of the entities mentioned in the letter that have been found to be using inaccurate or misleading messaging/characterization of our products," he added.
Further, the consumer groups took issue with PayPal Credit's fees and "deceptive" introductory no-interest offer, which allows borrowers to defer interest for the first six months.
Ted Rossman, industry analyst for CreditCards.com, cautions all consumers to be wary of deferred interest.
"Six months with no interest sounds great, but a lot of people don't realize that if they fail to pay the full amount by the time the clock runs out, they will be charged retroactive interest of 23.99% on their average daily balance all the way back to the beginning," he said.
"That can be very costly."