Home > 2016 > Students

Have Student Loans Created a New Generation of Payday Loan Addicts?

Advertiser Disclosure Comments 0 Comments

My wife and I were watching a news program the other day when a commercial for a prescription medicine piqued my interest.

The drug was designed to treat an ailment that, as it turns out, comes from taking another prescription medicine made to treat something else.

The absurdity of that inspired me to think about other instances where this might also be the case. Because of my predisposition to view such things in a financial context, I recalled a report I’d recently read on consumer-financing trends.

It touched upon an important reason why a rapidly growing number of 20- and 30-year-olds are signing up for loans from alternative finance companies — firms that pitch payday, tax-refund, auto-title and pawn-shop loans: Because their other debt obligations are leaving them short on funds.

Researchers at George Washington University’s Global Financial Literacy Excellence Center analyzed a 5,500 subsample of millennials who participated in the Financial Industry Regulator Authority’s (FINRA) 2012 National Financial Capability Study. They found that 42% of that subsample are currently or expect to soon become alternative financing company customers.

Why are so many 20- and 30-somethings apparently willing to risk their longer-term financial security by doing business with firms that are known for charging higher rates and fees than traditional lenders?

They haven’t much choice.

The researchers found that more than half of those surveyed were carrying credit card balances. Nearly 30% were overdrawing on their checking accounts and 20% had borrowed or taken hardship withdrawals from their retirement accounts. As such, their creditworthiness is, in a word, impaired.

What’s more, since budgeting is a zero-sum game and 54% of the surveyed millennials also said that they were concerned about their ability to repay their higher-education loans, it’s reasonable to conclude that these are the debt obligations that underlie the problem. Money woes related to student loan debts isn’t all that surprising: Roughly half of the student loans currently in repayment are either past due, in default, in forbearance or being accommodated by one of the government’s many relief programs.

So it’s quite possible that the reason why alternative finance companies are in such great shape is because the loans their customers had previously undertaken are making them sick.

Which brings me back to the absurd premise of needing a second medication to counteract the first.

If we are truly concerned about the increasing use of alternative financing products by consumers with worsening credit, it would make sense to address a fundamental reason why that deterioration is occurring in the first place: student loans.

We can start by abandoning the nickel-and-dime approach we’ve taken thus far and re-price the entire loan portfolio at rates that correspond with the government’s actual costs to fund and administer these contracts, and extend their repayment durations so that installments consume no more than 10% of a typical borrower’s monthly earnings.

Student loans would then become more affordable, and, as a direct result, the need for financing products that have the potential to compromise consumers’ longer-term financial health can mostly become a thing of the past.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Student Loans:

Image: Digital Vision. 

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team