A bipartisan group of U.S. Senators has introduced new legislation designed to regulate Income Share Agreements, a new form of financial aid for further education. The bill, which is being referred to as the ISA Student Protection Act, was proposed by Senators Todd Young (R-IN), Marco Rubio (R-FL), Mark Warner (D-VA), and Chris Coons (D-DE).
What Are Income Share Agreements (ISAs)?
Income Share Agreements (ISAs) are a method of student financing which allows an individual to share a percentage of their future income in exchange for receiving the funds they need to cover their tuition. Students who borrow money through an ISA will make payments proportional to their income after they graduate, but only if they get a good job with a salary over a certain amount.
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Income Share Agreements have been discussed for years by both colleges and coding bootcamps, but more recently, there has been a lot of activity in the space, and ISAs are being used by colleges, bootcamps, workforce boards, and more to solve many problems in the education landscape.
What Institutions Are Already Using ISAs?
Lambda School, founded in 2016, is a nine-month coding bootcamp which allows their students to pay for their education in exchange for a percentage of their future income. Students can agree to enter into an ISA, where they will pay 17 percent of their salary to Lambda School for two years after graduation, but only if the student gets a job that pays more than $50,000 annually.
If the student does not get a job, or they have a salary lower than the income floor, they will pay nothing back to Lambda School. If a student is very successful and gets a well-paying job, then the amount they will pay back is capped at $30,000—1.5 times the tuition of Lambda School—so successful students will only ever pay back a reasonable amount to Lambda. Alternatively, students can pay $20,000 upfront to enroll in Lambda School.
Many colleges around the U.S. have launched their own ISA funds to help increase access to their offerings. Purdue University in Indiana is the most notable university offering ISAs to their students and started their “Backa Boiler” ISA fund in 2016. The idea behind the fund is that students of any major at Purdue University can borrow the money they need for tuition upfront in exchange for a percentage of their future income. Students can borrow up to $10,000 each year and share between 1.73 percent and 5 percent of their monthly income, depending on the major they have chosen and the amount they borrowed. Purdue caps payments at 2.5 times the initial amount borrowed, and students do not have to pay unless they are earning over $20,000 annually.
Lackawanna College, Colorado Mountain College, the University of Utah, and other colleges are also exploring their own ISA funds.
What Is the ISA Student Protection Act?
The ISA Student Protection Act would introduce several regulatory clarifications surrounding ISAs and would help create more stability in the space.
Consumer Protections and Payment Exemptions
The first major part of the legislation would create a consumer protection exempting students from paying if they earn under a certain amount. Under the new legislation, individuals making less than 200% of the Federal Poverty Level ($24,980in 2019) would be exempt from making payments toward their ISAs. This would ensure that the spirit of ISAs—providing an affordable alternative to college—is maintained and that students who earn under a certain amount are protected by law.
Another feature of this legislation will require ISA funders to disclose to students how their monthly payments would compare under the ISA to other options, like private or federal loans. This would allow students to gain better insight into how much they would pay through an ISA compared to other options. It would make it easier for students to make a more informed decision about whether an ISA is the best funding option for them.
This will also help combat the common concern about ISAs that students are not provided enough information upfront about an ISA in comparison to other options. Although lenders have already developed their own best practices which are in use today, this legislation would establish clear legal expectations around borrower disclosures.
Federal Consumer Protection Laws
The ISA Student Protection Act would also apply federal consumer protection laws to ISAs. Sen. Warren’s recent letter to eight colleges and institutions offering ISAs, alongside her letter to the Secretary of Education, Betsy DeVos, featured concerns about how ISAs would apply to federal consumer protection laws. In her letter, Sen. Warren was concerned about whether the Equal Credit Opportunity Act, among other anti-discrimination laws, would apply to ISAs, and how lenders will protect students from problems like discrimination.
The Act would ensure that federal laws like the Equal Credit Opportunity Act, the Military Lending Act, the Fair Credit Reporting Act, and the Servicemembers Civil Relief Act, will apply to ISAs, further clarifying the position of these agreements under the law.
There are some other important features of this legislation as well. The Act would appoint the Consumer Financial Protection Bureau—the body in charge of regulating the student loan landscape—as a federal regulator and give the institution further oversight over ISAs. This would ensure ISAs are given the appropriate amount of attention by regulators and assist in protecting students against bad actors in the space.
Also, the Act clarifies the tax treatment of ISA contributions for funders and recipients and ensures ISAs are dischargeable in bankruptcy. Therefore, unlike student debt, if you are declared bankrupt, your ISA will be forgiven.
Finally, the Act would ensure that ISA providers cannot issue agreements that require payments higher than 20 percent of income for shorter-term contracts, with the cap decreasing to 7.5 percent for longer contracts (lasting up to 30 years). This protection would ensure students cannot share too much of their income, and thus do not enter into an agreement they cannot afford.
Benefits of ISAs
The main benefit of ISAs is that they increase the affordability of further education. Bachelor degrees are estimated to increase the average student’s lifetime earnings by around $1 million, according to a 2018 report by the White House’s Council of Economic Advisers and a review of the report by Leif, an ISA compliance company. Although the value of further education is clear, many people overlook college and other options due to the cost associated with attending a further education institution. ISAs offer a way people can pay for their education in exchange for a percentage of their future income—students don’t have to take out a loan for their education.
Senator Young commented on the bill stating that: “Far too often, I hear of students and their families being forced to endure financial hardship in exchange for a quality education. Government-provided student loan debt continues to skyrocket, while the average household income decreases”
ISAs also align the incentives of students and move the risk of pursuing further education away from the student. If the school does a good job of preparing a student for a job, they are more likely to earn a high return from that student. However, if the school offers poor educational services, then they will likely earn a lower return—or no return—which will cause them to incur a loss on the student.
Further, ISAs have been used by institutions to help offer another method of paying for an education for those who have a criminal background, DACA recipients, and those attending short-term training programs, who may not be able to access financing options such as federal student aid.
Sen. Warner, commenting on the bill, stated: “ISAs are also proving to be uniquely responsive to the needs of students who are ineligible for existing federal student aid programs,” which demonstrates the flexibility of ISAs and their ability to help further increase access to education.
The Need for Regulation
There have recently been many calls by industry leaders to start regulating these agreements. Last month, a group of 20 companies, philanthropic institutions, and colleges sent a letter to the House and Senate Finance Committees leadership requesting more comprehensive regulation around ISAs that “provides protections for student consumers and a legal framework to guide the work of institutions and providers.” Regulation is critical to the future of ISAs, as many are concerned about agreeing to an ISA, since it is unclear how the government regulates them.
Recent criticism of ISAs as being another form of student debt or offering exploitative terms has also highlighted the importance of creating a strong regulatory framework that protects both students and organizations working with ISAs. Sen. Warren has requested information from ISA issuers to gain greater insight into how they should be regulated and how they structure their agreements to protect students and the ISA issuer.
The importance of the ISA Student Protection Act is clear, as it would help ISAs become a more accepted form of student financing and ensure that any concerns held by regulators, colleges, and students about the agreements are addressed.
Previous Legislative Attempts
The ISA Student Protection Act is the most recent in a series of legislative efforts to regulate ISAs. In the 2015 legislative session, Sen. Todd Young introduced the Investing in Student Success Act in the Senate, which was renewed in other legislative sessions and has received little interest recently.
In 2019, Rep. Mark Green introduced the Kids to College Act in the House, which aimed to create a regulatory framework around ISAs as well.
How Is the ISA Student Protection Act Better?
The ISA Student Protection Act has been developed with the participation of many industry players and indicates a renewed interest in developing a new regulatory framework that protects both students and innovation in the space. Sen. Coons, a co-sponsor on the new bill, stated in the press release for the bill, “Most importantly, ISAs protect students from the risk of onerous debt and elevate programs that guide students to well-paying jobs. The ISA Student Bill of Rights Act will allow the innovation of ISAs to proceed safely and with more government oversight, to the benefit of American students and families”.
Although there have been a few concerns, as aforementioned, about ISAs highlighted by students and parents, the ISA Protection Act goes a long way to addressing those concerns and creating a landscape wherein students can safely enter into an ISA and realize all of its benefits—moving the risk of pursuing an education to the institution, incentive alignment, and increasing access to and the affordability of education.
There will likely be even more obstacles in the ISA market in the future. Indeed, this act has only just been proposed, and we have yet to see whether it will advance further and be enacted into law (unlike previous ISA legislation).
However, the increased interest in ISAs from regulators, colleges, bootcamps, students, and others indicate the strong prospects for this method of financing in the future.
The ISA Protection Act is a good step in the right direction to creating a fair marketplace and introducing certainty into the market.