Consumer Advocates: Regulate Income Share Agreements Like Loans

• Lawsuits and consumer advocacy groups have pushed ISAs into the spotlight.
• These agreements are popular among online bootcamps.
• Some expect the CFPB to redesignate these agreements as loans soon.

An increasingly popular way for students to fund higher education has the attention of consumer advocates who fear a lack of regulation could lead to predatory practices.

Income share agreements (ISAs) are being promoted to students considering enrolling in programs across the country as an alternative to paying for school through traditional private or federal student loans.

Rather than taking out a loan to pay back a flat tuition, ISAs allow students to pay for their education based on a fixed percentage of their monthly income post-graduation. They are particularly popular among online bootcamp programs, although some traditional universities, most notably Purdue University in Indiana, also offer this repayment method.

Though ISAs allow students to pay back a debt for education, the Consumer Financial Protection Bureau (CFPB) does not classify these agreements as loans. Advocates, however, hope that soon changes and are actively lobbying for regulation.

Reclassification could lead to more stringent oversight and prevent predatory practices involving ISAs, said Whitney Barkley-Denney, senior policy counsel at the Center for Responsible Lending.

Reclassification could lead to more stringent oversight and prevent predatory practices involving ISAs, said Whitney Barkley-Denney, senior policy counsel at the Center for Responsible Lending.

"If you give money to someone with expectations that you will pay them back," she said, "that's a loan."

What Are Income Share Agreements?

Exactly how much income students commit to sharing with their institution of higher education varies depending on the servicer.

The plans typically see students pay between 2-10% of their monthly income after completing the program, according to Career Karma's analysis of higher education ISAs. Rates could be even higher, however. The report points out that Kenzie Academy's ISA charged students up to 17.5% of their monthly income. Kenzie Academy no longer offers ISAs as an option.

Students can be locked into these payments for up to 10 years in some instances and as little as two in others.

One problem with ISAs, Barkley-Denney said, is that there is no uniformity. The space is still very new. And because they aren't classified as a loan, some regulations don't apply.

ISAs often have a minimum income threshold borrowers need to meet. So a borrower who makes less than a certain amount per year won't have to make payments toward the ISA. According to Bankrate, that typically means the term of the agreement is extended.

On the flip side, someone making substantially more than expected may pay back more than originally borrowed.

For example, someone may borrow $10,000 for a bootcamp and sign an ISA that says they will pay 10% of their income for the next five years. If that borrower makes $100,000 per year after graduation, they'll ultimately pay $50,000 back to the servicer or school over that period.

To prevent this, some ISAs come with a payment cap, according to Bankrate. In the above scenario, that cap might be $20,000 of total payments, meaning the borrower would have fulfilled their obligation after just two years.

One problem with ISAs, Barkley-Denney said, is that there is no uniformity. The space is still very new. And because they aren't classified as a loan, some regulations don't apply.

The Case for Reclassification

Borrower advocacy groups, like the Center for Responsible Lending, want to see ISAs classified as loans to offer more transparency for potential borrowers.

Barkley-Denney said that ISAs currently don't need to comply with the Truth in Lending Act. This act offers borrowers protections from inaccurate and unfair lending practices, including:

• Lenders must provide clear information about the repayment process and disclose what borrowers will pay back over time under different circumstances.
• Borrowers have the right to reconsider their decision and back out of a loan without losing money within three days of agreeing to terms.
• Lenders must adhere to anti-discrimination laws.

Without these protections, Barkley-Denney worries borrowers may be steered into what she calls "stacking" of loans. That occurs when a school or program encourages students to take out federal loans and then sign ISAs to cover remaining balances.

In these situations, borrowers would have to make their monthly ISA payments in addition to whatever their monthly loan payments are, she said. Neither payment takes the other into account, meaning borrowers would have very little, if any, discretionary income left over each month.

She added that ISA providers might also target students who can't qualify for federal financial aid, like undocumented people and those without U.S. citizenship. Without other options, these students may be saddled with ISAs that take large percentages of their income each month.

Signs of Future Action

The U.S. Education Department (ED) is limited in what it can regulate until the CFPB reclassifies ISAs, but it has implemented some oversight.

ED reminded colleges in early March that they must comply with existing consumer protection requirements established through the Higher Education Act. Schools must be transparent on the terms and conditions of any college-endorsed private lending, and the school must publicly state why they endorse a certain private student loan.

The department's reminder also pointed to an order from the CFPB last year regarding a student loan originator and its ISA.

While they await action from the federal government, some consumer advocacy groups are turning to the courts.

The CFPB issued a consent order to ISA provider Better Future Forward in September, calling for the company to reform its ISA program on the grounds that it misled borrowers. One of those misleading statements, the CFPB said, was that the company's ISAs are not loan products and do not create debt.

"The ISA industry has tried to evade oversight by claiming that its products are not loans," CFPB Acting Director Dave Uejio said regarding the case. "But regardless of the name on the label, these products are credit and have to comply with federal consumer protections. The ISA industry cannot pretend that core consumer protection laws do not apply to their products."

The CFPB also updated its examination procedures in January to include ISAs.

"Private education loans sometimes take non-traditional forms such as temporary credits and income share agreements," reads the updated language.

While they await action from the federal government, some consumer advocacy groups are turning to the courts. The Student Borrower Protection Center filed a suit in December against a for-profit bootcamp program run by Top Applicant and the student loan company Leif Technologies. It alleges the companies used deceptive practices to defraud students.