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The Wild West of Payday Loans for Joe College

NEW YORK (MainStreet)—Is the student loan crisis putting recent college graduates at risk of becoming lunch for predatory lenders before they can pay off their student debt? Maybe, if these twentysomethings find themselves trapped in a payday loan.

The Federal Deposit Insurance Corporation’s February 28 report on student loans says that student debt has tripled between 2004 and 2012, with 44% of all borrowers having loans that are yet to reach repayment status. Nearly 30% owe between $25,000 and $100,000, and 43% of all 25-year-olds had student loans in 2012. The value of outstanding loans is approaching $1 trillion, about 9% of the Gross Domestic Product. Payments on those loans can cut into living expenses.

Enter online payday loans, with triple-digit interest rates, balloon payments that call for the entire principal to be paid back in two weeks in addition to demanding that borrowers provide their checking account and bank routing numbers as a condition of the loan, giving the lenders access to their money.

Also see: Student Debt Diary: Wait, What was the ROI on my Education?

“Students should be extremely cautious about giving personal information to Websites claiming to offer them loans,” says Lauren Saunders, Washington, D.C.-based managing attorney at the National Consumer Law Center, a watchdog organization that monitors predatory lending. Saunders notes that borrowers may not even be dealing directly with a lender, but rather lead generators who are trafficking in customer data as they trawl the Web for prospective borrowers.

“Often, the Website is really run by a company that plans to sell their data to a lender,” Saunders says of the lead generators. “It is illegal to deceive prospective borrowers by leading them to believe that that they’re applying for a loan when in fact their private information will be sold to the highest bidder without their consent.” The lender who bought the data will then contact the prospective borrower.

These are not student loans; they are payday loans being marketed as student loans and are relatively new in online lending. But broke borrowers may not care once they are flying through the sign-up screens in order to get to the I AGREE button. With one click, they've not only signed up for a usurious loan but, as Saunders and others have pointed out, they give up their banking information to lenders who have been known to extract payments at will and in a random amounts, often below what is needed to retire the loan. The borrower runs a balance for an indefinite period of time, racking up fees and interest.

What the unschooled borrower faces is a Web-based Wild West. Payday Loan Easy offers a loan to anyone and approves everybody as it touts “student loans for housing.” Pay Student Online, which has a revolving series of landing pages associated with it, won’t check your credit score and promises immediate money—as long as you provide your account numbers. Landing pages change, sites and algorithms get re-coded, URLs come and go and where a prospective borrower is sent may depend on browsing history. What makes or breaks the loan is whether the lender has your banking information and a regularly recurring deposit, sometimes as low as $750 per month. Payday lenders want customers with a direct deposit so there will be cash flow they can use to extract payments.

Also see: Can the Student Debt Crisis Outshine the Housing Bubble

Online Lenders Alliance members do not target consumers with student loan debt,” said Peter Barden, spokesperson for OLA, the Alexandria, Virginia-based organization that represents Internet lenders. “The convenience of online loans are available to anyone who qualifies with a minimum income and checking account.”

Minimum income varies with the lender. “Unlike the long term debt created by most student loans,” Barden added, “short-term, small-dollar loans are designed to meet an immediate financial need and repaid in a couple of weeks.”

While the Department of Education is watching the growth of student loans, it doesn’t maintain data that distinguish between borrowers who are working and those who are unemployed. As a result of the 2010 Health Care and Education Reconciliation Act, it does not make private student loans, only direct student loans, which go from the federal government to the educational institution without the involvement—and the cost—of banks acting as a third party. Banks have no role in direct loans as they do in private student loans. “We don’t get involved in private student loans,” says Department of Education spokesperson Jane Glickman, “The Consumer Financial Protection Bureau monitors those loans.”

The CFPB, the National Direct Student Loan Coalition and Sallie Mae all declined to comment on students who are getting pay day loans.

Glickman says the Department of Education is extremely concerned about keeping borrowers from going into default and will work to prevent that. “We have added a lot of payment options that are designed to keep people out of default and prevent them from getting predatory loans or any loans they can’t afford," she said. "Loans to pay off loans to pay off loans are not what we want to see.”

“We want people to continue their education, she added, “but we understand that people who are right out of school might struggle with large payments so we’ve added different options." There are, of course, deferments for economic hardship like the Pay-As-You-Earn Plan, The Income-Based Repayment Plan, and the Graduated Prepayment Plan.

Loan forgiveness programs also exist for students who opt for a public service career, such as making a commitment to teach in public schools in low income areas for a certain number of years.

But the tide isn’t turning. There are currently $77 billion in student loans that are in default and that number is expected to rise. “History has shown the defaults always spike when the economy is bad,” says Glickman. If it’s pay your rent or pay your student loan, you’ll pay your rent.

The 2010 Health Care and Education Reconciliation Act will soon let new borrowers pay monthly loan payments equal to 10% of their discretionary income—it’s currently 15%--and be eligible for loan forgiveness after 20 years of timely payments—that threshold is now 25 years. But these don’t kick in until 2014. The crisis is now.

Also see: Rural Areas Give Incentives to those with Student Loan Debt

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