March 4, 2022
The Education Department clarified this week that income-share agreements in higher education are private loans. As loan providers, the companies that provide these agreements are regulated in different ways than before the clarification, and colleges have specific requirements in terms of how they promote the arrangements.
Income-share agreements (or ISAs) offer students up-front financial support and, in exchange, require them to pay back a portion of their future income for a set number of years. They are offered in some cases through colleges and in other cases by companies. Some providers of ISAs have argued that they are not loans.
The Education Department acted after the Consumer Financial Protection Bureau in September issued a consent order against a student loan originator for misleading borrowers about ISAs, failing to provide required disclosures and violating the prohibition against prepayment penalties for private education loans. The CFPB concluded in its order that a student loan originator’s ISAs are private education loans. Additionally, in January, the CFPB updated its examination procedures for private student lending to explicitly reference ISAs. The Education Department’s action this week essentially applies that ruling to all providers of ISAs in higher education.
ISAs were initially mainly used by students at coding boot camps and other skills training programs that aren’t eligible for federal student aid. Interest rates in the agreements have steadily increased in recent years. Supporters say ISAs could be a solution to rising student debt burdens—because they’re offered by private investors who want to see a return on their investment, it’s expected that ISAs will only be used for programs that will eventually pay off in future earnings. And because the contracts are based on students’ income, they won’t be burdened with payments they can’t make.
Others don’t view the contracts as favorably. Critics argue that income-driven repayment plans for federal loans also allow borrowers to base their loan payments on their income and that borrowers with higher salaries could end up paying more under ISAs than through traditional student loans. Senator Elizabeth Warren, a Democrat from Massachusetts, along with other congressional Democrats, has said contract terms could be “predatory and dangerous” and “include some of the most exploitative terms in the private student loan industry,” such as mandatory arbitration agreements and class-action bans.
Rich Williams, chief of staff of the Education Department’s Office of Postsecondary Education, wrote a blog post on the change in policy Wednesday.