Income-share agreements (ISA loans) have gained the attention of coding bootcamps and some two- and four-year colleges in the past few years. As described in previous analysis, ISA loans provide a student with a set amount of “principal” to pay for tuition, but set the loan repayment terms based on the student’s future income levels, among other factors, including income minimums and payment caps. As a result, the actual cost to student borrowers using this private debt product varies significantly on the terms, and is structured in a way that raises concern about the potential for predatory actors, triggering a need for the enforcement of consumer protections.
Unfortunately, at the federal level, some policymakers are currently attempting to pass a law that purports to create new regulatory structures for this debt product, but in doing so, would exempt it from existing state and federal consumer protections, such as usury laws and Equal Credit Opportunity Act (ECOA) discrimination protections. And at the state level, in the past year, proponents have been active in five states attempting to pass new laws on ISA loans that similarly raise concerns about consumer protections for borrowers.
A private debt product that bases the repayment amount on income levels after graduation may be appealing to some students, when compared with a traditional private loan that does not have those income protections. But in order for a student to make that comparison, she would have to have some reasonable way of predicting the likely overall cost of the loan after repayment (including the anticipated income she may receive), and then she would need to determine whether the income protection “insurance” was worth the added cost of the product. All of these factors, unfortunately, are nearly impossible for students to gauge, given current murky information used in the marketing of many of these products. And these products raise other consumer protection concerns as well: because some schools using this product often offer better terms to students enrolled in some majors over others, it raises serious questions of discriminatory impact under ECOA. ISA loans also, at times, include other invasive contract terms, including access to personal bank accounts to monitor wages. Finally, given that federal Direct Stafford Loans are almost always cheaper than private loans, and have greater consumer protections, the choice of ISA loans will almost never make sense for a student considering Direct Stafford Loans—particularly given income-driven repayment options that already exist for those federal loans.
All of this heightens the need for federal and state consumer protections. Yet, proponents are claiming that such products should be exempt from the existing consumer protection laws that apply to other private education loans.
What States Have Done On ISA Loans
States play an important role in regulating higher education, as well as in providing consumer protections regarding private student loans and other financial products, and so most certainly should seek to protect students from potential harm when signing up for ISA loans. Unfortunately, state legislative proposals on ISA loans seem, for the most part, to be headed in the wrong direction.
Illinois and Massachusetts have made statutory changes that support the creation of ISA loans. Illinois created a “Student Investment Account” that allows the state treasurer to invest in strategies related to paying for college, including income share agreements. The statutory authorization does not explicitly address the consumer protection framework that applies to such products, but apparently the industry views the law as distinguishing them from other financial products and oversight: It is worth noting that the lawyers working with ISA companies, when writing on the Illinois efforts, felt it important to lead with the idea that the legislation “distinguishes them from loans.” It seems as if industry proponents are attempting to gain some legal footing to substantiate claims that products are exempt from existing consumer protections for student loans. In Massachusetts, supplemental budget language included funding to support private fundraising by public colleges, with a number of options listed, such as the creation of “income share arrangements,” but did not provide additional specifics.
States may also make subtle changes to their laws that, in effect, remove consumer protections for students. For example, in Indiana, the legislature changed the state’s consumer credit statute to exempt universities (and the ISA companies they work with) from its protections. Such changes are harder to track, and it is difficult to know whether more states have made similar changes.
Bills in at least two more states have been proposed, but not enacted. Legislators in Washington state attempted to create a new (flawed) regulatory structure for these products separate from consumer finance and debt statutes, as well as fund a pilot ISA loan program. In California, legislators introduced a bill that would create a pilot program, while, at the same time, presumably exempting them from certain existing consumer protections. In both states, the legislation went out of its way to state that these products are not “debt instruments.” None of these bills have passed.
Going forward, states could—and should—instead take a more positive approach, proactively protecting students. They could clarify to industry that ISA loans are, in fact, subject to state consumer financial protections, and enforce those statutes; demand that they should not be stating that these products are “not loans,” or that higher education programs that utilize ISA loans require “no tuition,” when, in fact, they may meet the state definition of a loan or debt instrument; and explore additional, not reduced, protections for borrowers that take out ISA loans. As guardians of their laws and protectors of their residents, states are indeed obligated to do so.