Loyola University Chicago School of Law, JD 2022
As of November 8, 2020, the student debt crisis reached $1,769,280,155,524. There’s no easy way to address a $1.7 trillion problem and the increasing cost of higher education, coupled with the necessity of a four-year degree, will only exacerbate the issue. From 2000 to 2016, the average annual cost of college more than doubled, from around $15,000 a year to nearly $32,000. The New York Fed most recently identified a phenomenon acknowledging that when you flood the marketplace with subsidies, like grants, loans, etc., it enables higher education to continue to raise prices. For every dollar of new public subsidy, prices for college have risen between 60 and 70 cents. There are a number of proposals as to how to address this crisis – from federal statutes to private intervention – but income sharing agreements (ISAs) have largely been left out of the conversation. ISAs are not without criticism, particularly because of concerns about excessive interest. However, many of the criticisms could and should be addressed by comprehensive regulation, as any other type of lending has been. ISAs will likely be part of the future solutions of financing education and, as a result, regulators need to pay attention.
What is an Income Sharing Agreement (ISA)?
Put simply, an income-sharing agreement is an agreement between a student and their school in which the student borrows money from the university to fund their education, and in exchange, they pay the university a percentage of their salary after graduation. The terms of ISAs vary widely by the schools that provide them. In many ways, ISAs are seen as “gap fillers” in our current education financing system. Students can only borrow a limited amount of money from the government and private loans can be expensive and/or difficult to be approved for. ISAs can provide a distinct option for students who cannot finance college in traditional ways.
Where have ISAs been used?
There are a number of colleges and startups, like coding boot camps, that are looking to ISAs as “a way to rewrite the college-tuition equation.” For example, the Holberton School, which opened in San Francisco in 2016, is a for-profit software-engineering college. Kristine Bredemeier, head of Holberton’s admissions and enrollment, notes that ISAs are a way to align the school’s and student’s interests. She explains that the structure of an ISA at Holberton School works like this: the school is free until –– and only if –– the student finds a job that pays over $40,000. Once they find a job, they pay seventeen percent of their income for three and a half years. Bredemeier highlights that typically Holberton students are earning over $100,000 in their first full-time software-engineering position.
Purdue University is an example of a public institution that is pursuing ISAs. Under Purdue’s Back a Boiler ISA fund, sophomores, juniors, and seniors may enter into ISAs of up to $10,000 a year. The ISA varies with what the student studies. For example, Mitch Daniels, Purdue’s president, explains that a chemical engineer would pay about two and a half percent of income for maybe six or seven years, whereas, a psychology major might pay four or five percent of income because a psychologist is generally likely to make less than a chemical engineer. The repayment is capped at two-and-a-half times the initial outlay in the event that a student “knocks it out of the park” in terms of income upon graduation. The student isn’t “on the hook” to repay the loan unless they find a job. There is also a comparison tool on Purdue’s website that allows a student to determine whether an ISA or more traditional method of financing their education is best. Daniels argues the risk of paying for the degree is shifted from the student to the investor. Arguably the biggest advantage of an ISA set-up, like Purdue’s, is that it incentivizes universities to put their money where their mouth is and deliver to students exactly what it is they go to college for –– jobs. Investors will not get their Return on Investment unless the student secures a job. This encourages universities to provide an education that makes a student competitive in the job market.
The lack of ISA regulation inhibits widespread and responsible use
Like any type of lending arrangement, ISAs have pros and cons. Comprehensive regulations surrounding ISAs could address some of these cons. However, the debate about whether ISAs are contracts or loans makes them tricky to regulate. Currently, no federal statute directly addresses ISAs, and some states have considered, but not passed, ISA-related legislation. Because there is no legal definition of ISAs, it is difficult to know if and how regulatory statutes like, the Equal Credit Opportunity Act, Truth in Lending Act, state laws governing the assignment of wages, and more, would be applicable.
The lack of specific regulation regarding ISAs can rightly make consumers wary. Caleb Rosenberg, an attorney whose practice focuses on regulatory enforcement, warns that due to current regulatory uncertainty, market participants must carefully weigh the legal risks. Here, a lack of regulation may be inhibiting the growth of a potential solution to education financing. Consumers might be more willing to participate in the ISA market if fears of being taken advantage of were quelled by fair and effective regulations.
What would regulation look like?
Ethan Pollack, the associate director for research and policy at the Aspen Institute, says “we need regulations that are as strong, if not stronger, than already exist for traditional debt.” Bipartisan ISA-specific legislation has been introduced but has not made significant progress moving through Congress. Regulators ought to focus on capping repayment amounts to mitigate issues of predatory lending and on instituting fair minimum income amounts before repayment is mandated. Ultimately, comprehensive ISA-specific regulation is necessary to make ISAs part of the solution, not part of the $1.7 trillion problem