An Income Share Agreement (ISA) is a contract in which a lender gives a student money for education, and in return, the student promises to pay the ISA-provider a fixed percentage of the student’s income for a set amount of time after graduation. The student may repay more or less than the amount received, depending on the terms of the ISA.
In December 2019, the U.S. Department of Education announced an Experimental Site Initiative regarding ISAs, which allows the Department to waive certain requirements in Title IV of the Higher Education Act of 1965, as amended. Through this experiment, an institution of higher education may take on the repayment obligation for a student’s federal loans, and in return, the borrower would repay the institution based on a predetermined methodology, such as by providing the institution a share of the borrower’s earnings. The goal is to incentivize the institution to provide the student-borrower with an education that leads to greater earning potential.
Institutions of higher education are not prohibited from allowing their student-borrowers to enter into ISAs, and some institutions like Purdue University offer ISAs through their foundations. Institutions that offer ISAs or that partner with lenders that offer ISAs, however, should be aware of the risks and receive counsel on best practices with respect to ISAs. Many federal and state agencies regulate ISA lenders and entities that collaborate with ISA lenders.
Most recently, on September 7, 2021, the Consumer Financial Protection Bureau entered into a consent order with Better Future Forward to resolve an Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) claim for purported deceptive practices involving misrepresentations to consumers based on statements that ISAs are not loans and do not create debt, failing to provide certain required disclosures, and imposing unlawful prepayment penalties on private education loans.
Under the consent order, Better Future Forward is required to:
- stop claiming that ISAs are not loans;
- stop claiming that ISAs do not create debt for consumers;
- reform its ISA contracts to remove prepayment penalties on private education loans or recalculate the payment caps to eliminate the prepayment penalty;
- provide notice in writing to each consumer who has an outstanding ISA of the consent order; provide disclosures required by the Truth in Lending Act (TILA) and its implementing Regulation Z for closed-end credit; inform the consumer of the reformation of the Total Payment Cap;
- not object to any discharge of a student’s ISA in bankruptcy.
Notably, the consent order did not impose a civil money penalty due to the substantial cooperation from the Better Future Forward during the CFPB investigation and likely because the prior murky regulatory landscape. Lenders that offer ISAs, however, should be aware of the risks and prepare accordingly. Similarly, institutions of higher education that receive federal financial student aid under Title IV of the Higher Education Act of 1965, as amended, and also offer ISAs or that collaborate with ISA lenders should be prepared to face increased scrutiny from regulators such as the CFPB and the U.S. Department of Education’s Office of Federal Student Aid as well as state attorneys general.