How ‘Shadow’ Debt Dogs Students at For-Profit Schools

Beyond the Headlines: Personal finance news and research you may have missed

Beyond the Headlines

By now you’ve heard—or more likely, seen for yourself—that consumer prices for gas, groceries, and everything else are out of hand. You may also have heard about how the Federal Reserve is aiming to clamp down on inflation by raising its benchmark interest rate, and how that effort comes with some unintended side effects—namely skyrocketing borrowing costs on home loans and the risk of causing the economy to slip into a recession.

But here’s what you may not have heard. Did you know that some college students are using unconventional means, such as buy now, pay later plans, to pay their tuition—and racking up “shadow” student loan debt in the process? Or that you could be flagged on background checks if you have the bad luck to share a name with someone with a shady past—a “shoddy” practice that the government’s consumer finance watchdog is trying to stop?

To reach beyond the biggest headlines, we scoured the latest research, surveys, studies, and commentary to bring you the most interesting and relevant personal finance news you may have missed.

What We Found

Study Now, Pay (And Pay, And Pay) Later?

You’re probably aware of the controversy over student debt—whether the deadline for federal loan repayment to resume should keep being extended, and whether President Joe Biden should forgive some of that debt. But there’s a whole category of student debt that’s been largely flying under the radar because it isn’t owed to the government or to banks like regular student loans, but to other lenders, including to buy now, pay later (or BNPL) companies that are more typically thought of as a way to finance a Peloton, not a college degree.

The debt we’ve heard about the most belongs to the 43 million borrowers who have federal student loans. That’s the overwhelming majority of student debt, representing about 92% of the total; there’s also a relatively small chunk of private student loans. Off this beaten path are students with “shadow” student loans outside the traditional system, including BNPL loans.

Shadow debt includes money owed directly to schools, tuition financed with buy now, pay later plans, and even “income share agreements” in which students pledge a certain percentage of their future income to financial companies in exchange for tuition money, according to a March report by the Student Borrower Protection Center, a student loan advocacy group.

What’s more, those kinds of unconventional student loan products are usually used to attend questionable for-profit colleges rather than traditional institutions, and tend to be rife with “junk fees,” that is, hidden, unfair, or overpriced fees, according to the advocacy group. The group recently detailed a litany of complaints about shadow student loans and their junk fees—especially about PayPal Credit—to the Consumer Financial Protection Bureau, the government’s predatory lending watchdog, which has sought comments from the public to aid in a crackdown on such fees.

An investigation by the advocacy group released in March found that 50 unaccredited or “otherwise questionable” educational institutions were accepting student payments through buy now, pay later services such as Klarna, Afterpay, and other providers. Students are using BNPL loans to pay for unaccredited and/or unregulated classes on cosmetology, outdoor survival, reiki, information technology, midwifery, wigmaking, real estate brokerage, eyebrow microblading, and other topics, the group found.

Buy now, pay later plans typically allow people to buy products by splitting payments into four or more parts that are usually interest-free as long as they’re paid back on time. But advocates say they also come with greater risk such as the potential for racking up excessive late fees, and often lack the consumer protections available via traditional loans. In fact, they accused BNPL companies of relying on late fees as high as $25 per infraction to prop up their business models.

A Klarna spokesperson said via email that its loans were an interest-free alternative to credit cards, and that education-related purchases made up 0.1% of its business, with most of that for things like college textbooks and online language courses.

Neither Afterpay nor PayPal immediately responded to requests for comment.

“Student loans are already fraught with peril for borrowers, and the shadow student debt space has long been where these dangers are most acute,” the student loan advocacy group said in its report. “The present findings point both to the increasing trend of companies in adjacent industries seeing lucrative opportunities in education financing, and to the extensive dangers that these firms’ entry into the shadow student debt market poses for students.”

When Your Name Isn’t Your Name on a Background Check

When credit reporting agencies and background check companies look up records using only your name—but no other identifying details—that’s not only “shoddy” practice, it’s illegal, according to an opinion issued late last year by the Consumer Financial Protection Bureau. A recent court case illustrates how much havoc such shabby background checks can wreak on a person’s life.

In 2016, a Tennessee man named Keith Dodgson wanted to help coach his son’s Little League team. The position required a routine inquiry with First Advantage, a background check company, to make sure he wasn’t a sex offender. Dodgson was sure he would pass, and with good reason—after all, his record was spotless. But that’s where the trouble began, according to court documents.

Sure enough, Dodgson’s record was clean, but the same could not be said for his estranged father, who lived in a different state and went by the same name—and First Advantage’s check found the elder Dodgson’s record as a registered sex offender.

True, anyone could tell the two Dodgsons were different people because of their ages, but the background check company was running a “name-only” search. That was because the database for Dodgson’s jurisdiction only included birth years, not exact dates of birth, and it was its policy to do name-only searches in such cases in order to cast as wide a net as possible. First Advantage told Keith Dodgson that it would inform its client, the Little League, about the name match even if other information like birth year differed. That would leave it up to Little League to check the state sex offender database and draw its own conclusions.

The Little League people never got the chance. After First Advantage informed Dodgson of the match and said it would turn the information over, he was so humiliated that he decided not to coach after all. He also changed his family name to Erickson to avoid the stigma his father’s name brought. He then had to tell his friends and neighbors why he changed his name, and because he had been in the military, he had to explain it there as well.

In 2016, Erickson sued First Advantage Background Corp., accusing the company of violating the Fair Credit Reporting Act—a federal law that requires accuracy in background checks—by passing on the fact that their search turned up a name match even though he and his father are obviously not the same person. In 2020, however, a federal appeals court judge ruled against Erickson, saying that First Advantage had provided an accurate report since they noted in their findings that it was possible the two Keith Dodgsons were different.

Erickson’s case highlights why the issue has caught the attention of the CFPB. Name-only searches such as the one that upended Erickson’s life are especially prone to errors, bureau officials noted in a November report, especially for people with common names like Smith or Hernandez. The problem is worse for Black, Hispanic, and Asian people since they're statistically more likely to have identical names to one another, the bureau said.

Benefits of a Child Allowance Far Outweigh the Costs

Last year’s temporary expansion of the child tax credit may have expired—dragging millions of children back into poverty as it did—but President Joe Biden hasn’t given up on reviving it yet. A new study indicates that if the tax credit were not only brought back, but officially converted to a child allowance that went to nearly everyone, its long-term benefits would pay for its costs more than 10 times over.

Turning the expansion into a permanent allowance would cost $97 billion annually, but return $982 billion in social benefits per year, researchers at Columbia University estimated in a study released in March.

The researchers arrived at those figures after tallying the impact of an allowance for both parents and children on taxes paid, educational attainment, health, longevity, money spent on other welfare programs, child protective services, the criminal justice system, and other factors. The paper drew on 21 previous studies about what happened to people’s lives after they were given cash or other benefits, and extrapolated their effects to estimate the impact of an allowance similar to the expanded child tax credit.

Everywhere the researchers looked, they found that such an allowance would deliver substantial long-term benefits, especially when it went to low-income households. For example, for every $1,000 a low-income household with one parent receives for one child, that child’s earnings as a working-aged adult will increase by $1,444, the researchers said.  Every $1,000 also lessened the future economic impacts of crime by $1,117, mainly by reducing the damage done to crime victims. The researchers even put a price tag on the better health and longer lives that would be enjoyed by children who would receive the allowance: $424 billion.

As recently as the State of the Union address in March, Biden was pushing to renew last year’s expanded child tax credit. The expansion, a pandemic relief measure, increased the credit’s value to a maximum of $3,600 per child (depending on the child’s age and the parents’ income) from the standard $2,000. It began sending the credit as advance monthly payments, and, crucially, let households claim it even if they made no money at all or too little to have it deducted from their taxes. Democrats had hoped to pass the expansion along with the Build Back Better spending bill last year, but the effort stalled when a key lawmaker, Democratic Sen. Joe Manchin of West Virginia, said he wouldn’t support it

Here’s How Housing Could Crimp the Fed’s Inflation-Fighting Tactics

The Federal Reserve has begun a campaign of  raising its benchmark interest rate in an attempt to quell the surging inflation we’ve all been dealing with. But what if it does the opposite, and only pours gasoline on the fire?

That’s the worst-of-both-worlds scenario laid out by David Dworkin, president and CEO of the National Housing Conference, a nonprofit group that advocates for affordable housing. In a recent blog post, Dworkin warned that the housing market is so much of a seller’s market that it could actually undermine the Fed’s anti-inflation strategy.

What officials at the Fed hope will happen is this: As the central bank raises interest rates, borrowing costs throughout the economy will increase. That will discourage spending and help bring supply and demand back into balance, which in turn will make those rampant price increases calm down—at the cost of slowing economic growth, to be sure, and with the risk of triggering a recession.

But the Fed’s plan could go off the rails because of the hot housing market, Dworkin says. In theory, the central bank’s rate hikes should raise mortgage rates, which should discourage homebuying, which should lower prices. Indeed, the first part—rising mortgage rates—is already happening. But the housing market is anything but normal these days, so it might not respond to those higher rates as expected. There’s a chance, Dworkin said, that demand for available and affordable homes will stay high and, with the number of homes for sale near record lows, home prices could continue surging.

If that happens, the overall cost of housing could continue to soar as well. And, since housing costs are part of inflation calculations and could become an even bigger part as other factors subside, the Fed’s fight against inflation could be thwarted, Dworkin argued.  The risk of that happening would be even greater if rate hikes crush homebuilding faster than demand for homes, which would exacerbate the country’s chronic shortage of homes, he added.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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