Loyola University Chicago School of Law, JD 2022
In times of economic recession, Americans historically have sought additional education to mitigate minimal employment prospects and retrain for an evolving job market. Coding bootcamps may be especially attractive in the era of COVID as they provide vocational training in a growing field and many programs are offered remotely by design. These programs may become even more enticing because of a new financing instrument called an income share agreement (“ISA”).
What exactly is an income share agreement?
Currently, only a small portion of the estimated $1.6 trillion of student loan debt is attributed to ISAs and a mere five dozen traditional education institutions offer them. However, ISAs are gaining traction with both unaccredited schools, whose students cannot access federal funding, and in traditional higher-ed.
An ISA is a deferred tuition arrangement where a student agrees to pay their school a percent of future earnings in exchange for training. Repayment begins only once the student has secured income above a certain threshold. Three key terms typically dictate how an ISA is paid back and ultimately how much a borrower will repay. First, the total payback amount is capped at a predetermined multiple of the borrowed amount. Second, a student may fulfill the terms of the ISA if they complete a certain number of payments regardless of amount repaid. Finally, any remaining balance on an ISA will be forgiven after a certain period of time passes after the initial payment period begins.
Regulations & the current consumer protection environment
ISAs remain largely unregulated despite their increasing popularity. Congress introduced the bipartisan ISA Student Protection Act of 2019 which proposed the legal framework to further define ISAs and their critical terms. The bill outlines consumer protections by placing a cap on the amount of income that can be repaid, the length of the repayment term, and by providing an income minimum under which required payment is zero. However, the bill also states that ISA servicers are not considered creditors and therefore not subject to disclosure and timing requirements under the Truth In Lending Act.
In 2019, Georgetown Law professor Adam Levitin speculated that if legislators wait too long to regulate the growing industry it could use “potential disruption and reliance of consumers” to protect itself, a tactic reminiscent of other industry-disruptors.
Two non-profit consumer advocacy groups took matters into their own hands on June 1, 2020 when they filed an official complaint with the Federal Trade Commission (“FTC”) against major ISA player Vemo Education requesting that the FTC conduct an investigation into Vemo’s business practices. The complaint alleges that Vemo used deceptive marketing tactics like inflated estimates of other financing options and understating starting incomes that could result in students owing much more money than expected.
Who do ISAs actually benefit?
Many regulatory agencies and consumer advocates claim that an ISA is ultimately debt repackaged in a new way and deceptively expensive. Indeed, a student may pay more than tuition if they land a high-paying job. However, payments are adjusted when income falls so a student theoretically will never have payments they cannot afford.
In a letter to Secretary of Education Betsy DeVos, Sen. Elizabeth Warren and others voiced concerns that ISAs lack transparency and have next to no oversight from regulators. Critics are also concerned that Wall Street is beginning to view students as an investment opportunity. An online ISA marketplace connecting accredited investors to schools selling ‘shares’ of the ISAs is evocative of the collateralized debt obligations that contributed to the 2008 housing crisis.
On the other hand, Silicon Valley companies and political conservatives tout the inherent fairness of an ISA stemming from its fluid structure and the accessibility they offer to those who cannot pay for education upfront. Supporters also believe ISA incentivize institutions to support students beyond graduation and into securing gainful employment; something some educators believe hasn’t been a priority for educational institutions.
The conundrum with nontraditional financing options lies within their main goal; making funding available to those who might not otherwise be able to secure it. If regulators want to make an impact on this emerging field, they will need to act quickly.