Cash-Strapped Students are Turning to Cash Advance Loans
With cash-strapped students turning to cash advance loans for financial aid, it’s time for government agencies to do some soul searching. While short-term lending provides immediate relief, it also results in students falling deeper into debt. Recent studies and surveys confirm the depth of this problem.
Broke Students are Searching for Financial Aid from Cash Advance Loan Lenders
The Global Financial Literacy Excellence Center at George Washington University completed a study confirming that of the students who participated, 42 percent of them had turned to alternative lenders to borrow cash. For the study, the research team defined alternative lenders as pawnshops, payday loan lenders, auto title loan creditors and rent-to-own providers. Pawnshops and payday loan lenders saw the most action from college students with 34 percent of the study’s participants admitting that they had turned to these types of lenders for financial aid.
Not only is this an issue in the United States, but UK publications have also reported that students are struggling to pay for their university experience. Impact Magazine printed an article featuring a survey completed in the UK by Future Finance, which is a student loan company. The loan company’s survey found that 31 percent of the country’s students depend on payday loans, overdrafts and credit cards to get by.
Government Loans are Failing to Cover the Costs
According to the Future Finance survey, 70 percent of respondents admitted that their government loans were not enough to cover the full costs of studying at a university. When students don’t have enough money to pay for their expenses, they turn to other means for support. Some seek immediate funds from cash advance loan lenders while others ask for help from family members or friends.
Both reports determined that students are also struggling to understand finance in general. The Future Finance survey verified that a quarter of respondents stated that they do not consider payday loans or credit card balances a form of debt while 40 percent of them admitted that they did not know what APR meant.
The George Washington University study found that just 24 percent of millennials exhibit a basic understanding of financial knowledge. To determine this, the study tested them on their ability to complete interest rate calculations, understand how interest accrues on a mortgage loan and the relationship between bond prices and interest rates.
Government agencies could help students by requiring states to teach financial literacy. PBS reports that as of now, just 17 states require high school students to take personal finance courses.
Are Cash Advance Loan Lenders Intentionally Trapping Students?
According to the Consumer Financial Protection Bureau, cash advance loan lenders intentionally trap individuals who are financially vulnerable in a cycle of debt. These lenders often operate out of states that do not cap interest rates such as South Dakota. In this state, cash advance online lenders charge annual interest rates that average 574 percent whereas the average APR for credit cards is in the neighborhood of 15 percent.
If a borrower took out a $100 cash advance loan in South Dakota but did not make a single payment, he or she would wind up owing $674 within a year. Because many debtors struggle to repay these loans timely, they end up taking out a second one to pay for the initial loan. This is when things start to spiral out of control.
Most students certainly fall into the financially vulnerable category. Lenders take advantage of them by offering a simple and fast solution to their financial struggles. Online cash advance searches for help with student debt are full of sites that offer short-term loans. These sites target students who are waiting for their parents to send money from home or for a disbursement of financial aid.
Why Are College Students Turning to Alternate Lenders?
While a lack of financial literacy is certainly to blame for many college students turning to alternate lenders, desperation is another key factor. Most college students don’t have savings to depend on when financial emergencies happen. About 50 percent of students said that they would be unable to gather $2,000 if the need arose. This is not just a problem for the millennial generation. A Federal Reserve study found that just 53 percent of adult respondents believed that they could gather the funds for a $400 emergency without borrowing the money or selling something of value.
According to statistics from 2013, seven out of every 10 graduates of nonprofit and public schools were completing their educations with student loan debt that averaged $28,400 per person. Not only are young adults facing massive debt loads to gain their higher education, but they are also dealing with growing rents and deteriorating wages.
Most Students Don’t Have Credit
Building credit takes time. Because it does, most students don’t have it, which means that their borrowing options are few. In addition, if a student misses just one student loan payment, the derogatory mark has a much greater impact on his or her credit score when he or she has little credit history to begin with, making borrowing through traditional financial institutions less likely. This situation may tempt students to look to cash advance online loan lenders for help. However, it’s definitely time for banks and other traditional lenders to step up and help desperate borrowers who have no or poor credit histories gain access to emergency funds.
So, What’s a Struggling Student Supposed to Do?
To build credit, students can take advantage of student-based credit cards as long as they use them wisely. Financial institutions that offer these types of accounts know that they’re issuing them to those who lack credit. Secured credit cards are another way for those who have little or poor credit histories to build them.
David Weliver, the founder of a website called Money Under 30, advises students to “Put yourself through a year or two of hustle. Get a second job, do freelancing, sell stuff on eBay. Not everyone can do it, but if you can, consider it.” Other helpful suggestions consist of paying down debt, establishing an emergency fund and saving for retirement. If possible, it’s also a good idea to start investing. With these steps, borrowers can avoid taking out an online cash advance loan.
When a Cash Advance Online Loan is the Only Option
CNBC spoke to Bruce McClary, a spokesperson of the National Foundation for Credit Counseling, and he has some advice for those who have few choices when it comes to borrowing money. He said, “If all other options have failed and you have to turn to a payday lender, make sure you know the laws in your state.” It’s time for something to give when cash-strapped students are forced to turn to online cash advance lenders to make ends meet. Learn more about the debt problems of college students at the Personal Money Store.