Service Members and Veterans: Beware of Paycheck Advance Apps and Easy 'Credit'

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This June 10, 2015, file photo shows a chip credit card in Philadelphia. Brushing up on the basics of your credit score can give you a fresh start this year and help you know how best to build and defend it. (AP Photo/Matt Rourke)

Mike Saunders is the director of military and consumer policy at Veterans Education Success

Service members and veterans need to be wary of new forms of credit-like products that have popped up in recent years, especially "paycheck advance" products and Income Share Agreements.

One problem for service members and veterans is that current legal protections may not cover these new "products." For example, the Military Lending Act gives service members low interest rates on most forms of consumer credit and is documented to have successfully reduced service members' use of payday loans since its 2006 enactment. But does it reach these new "products" that have popped up in recent years?

The term "credit" has a technical definition. The federal Truth in Lending Act (TILA) defines "credit" as the right granted by a "creditor" to "defer payment of debt or to incur debt and defer its payment." A "creditor" is one who regularly extends credit that is either repayable in more than four installments or has a "finance charge." Once a product is determined to be "credit," important federal protections are triggered, like fee disclosures.

But there are some new products that might not be covered by the laws and that service members, veterans, military families and survivors should be wary of:

Paycheck Advance Apps

Paycheck advance products like Earnin allow people to borrow up to $400 that is often repayable over a short period of time, often less than a month. The company uses an ACH debit authorization to pull the money from the borrower's bank account on the due date. Instead of charging a fee, Earnin solicits tips.

"I definitely didn't think about the payback time and the interest," Nisha Breale, a student at Georgia Southern University, told NBC News about realizing that her "tip" amounted to a 130% interest loan. "They just portray it as being so simple and so easy."

Do current legal protections cover this new idea? The Truth in Lending Act's definition of "finance charge" does not address tips, which, in Earnin's view, distinguishes its paycheck advance product from payday lenders.

Is the company right? Some legal scholars interpret the terms to mean that payday advance products aren't "loans," suggesting Truth in Lending Act legal protections may not apply. But other knowledgeable legal scholars think that payday advance products would seem to be considered credit under the Consumer Financial Protection Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Fair Debt Collection Practices Act.

Some state governments have started to take action.

  • In January, California entered into agreements with wage advance companies. They require the companies to deliver quarterly reports to California's new Department of Financial Protection and Innovation, beginning in April, that allow the state to evaluate the benefits and risks to consumers and determine whether the product constitutes a loan.
  • New York's Department of Financial Services, along with 10 other states and Puerto Rico, opened an investigation into the practices of these companies in 2019 as well.
  • Alaska's Banking Division at the Department of Commerce reopened a similar inquiry in 2019, the chief of enforcement told NBC News.
  • New Mexico's Financial Institutions Division told NBC News it plans to send a letter to Earnin to ensure the company is complying with the state's new ban on payday lending, the office's director said.

Income Share Agreements and Student Loan Alternatives

We strongly recommend that veterans, service members, and military families and survivors stick to traditional federal student loans that are protected by the federal government.

We urge you to be wary of student loan alternatives, especially "Income Share Agreements." Income Share Agreements (ISAs) are being offered as a substitute for student loans, in that the "lender" gives money to the "borrower" for tuition and/or living expenses. This lets a student attend class without paying anything upfront, but after they graduate, they need to pay a percentage of any future income back to the school. This type of arrangement may seem especially attractive to students from historically marginalized communities whose access to traditional ways of financing higher education may be more limited.

Not paying upfront for school may look like a good proposition, but the catch is that ISAs can be far more expensive than traditional student loans, whether you end up earning more or less than what you expect. The contract may state that if you get a degree and can't get a good job, you will owe little or nothing. But hidden traps still can make ISAs unaffordable -- people may have ISAs on top of traditional student loans, and ISAs may require a higher payment than federal income-based repayment programs. If you end up making a lot of money, the price can be steep. Worse, there can be a huge hidden prepayment penalty.

One might think that this would incentivize schools using ISAs to provide a high-quality education to ensure the student has a high income, but that might not be the case. For example, our organization received complaints from student veterans about a California IT school called Lambda that relies primarily on Income Share Agreements:

Lambda's webpage claimed that "Our ISA is an investment in you," and "Lambda School only makes money if you land a job making $50k or more." Another Lambda webpage states that "we only succeed when you do."

The veteran we were helping felt that these were empty promises. She found a disorganized program that barely taught students basic tech skills. These issues prompted her to do some research, and she discovered that California previously ordered Lambda to stop enrolling students. She and other students wanted to get out of their ISAs. Eventually, enough students complained that Lambda defrauded them by making promises it didn't fulfill, and Lambda offered for students to get out of their ISAs and the option to go to arbitration.

One student who was let out of the ISA by Lambda found it difficult to be accepted into IT programs at other schools. Some students who arbitrated their complaints against the school found the odds stacked against them and lost, according to the students. Veterans Education Success asked the state of California to take action on behalf of students. Lambda later agreed to change its ISAs into retail installment contracts to comply with state laws.

Does the law protect you if you agree to an Income Share Agreement? Opinions differ as to whether ISAs constitute "credit" under federal law or not. At the moment, ISAs probably don't give you the same rights and protections as federal student loans (like the right to get your loans forgiven if you are severely disabled or if your school cheated you). We urge the Consumer Financial Protection Bureau (CFPB) to take a closer look at these agreements and issue regulatory guidance on ISAs before too many students go to school using these products without fully understanding the ramifications.

Veterans, service members and military families should try to avoid private student loans. My organization, Veterans Education Success, always counsels student veterans that if they have to take out student loans, they should look to federal loans first, and our staff is here to help. Until the law catches up, service members and veterans need to be on the lookout for these new alternatives to federal student loans. Sadly, there are too many companies out there that will scam a veteran.

-- Contact Veterans Education Success by email at Help@VetsEdSuccess.Org

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