Bipartisan Bill Would Regulate Income Share Agreements

A bipartisan bill aims to clearly define and regulate income share agreements (ISAs), a relatively new and increasingly popular way for students to fund higher education.

Republican Sen. Todd Young of Indiana proposed the ISA Student Protection Act of 2022 this month alongside two Democrats and another Republican.

The bill would limit how much ISAs can take out of a borrower’s monthly income and how long they can be on the hook for this alternative to traditional student loans. It would also give the Consumer Finance Protection Bureau (CFPB) new powers to hold ISA providers accountable to crucial parts of the Truth in Lending Act.

Rather than lumping ISAs into the same regulatory guidelines as traditional loans — something borrower advocates have pined for — the bill would instead create regulations built specifically for ISAs, Ethan Pollack, a director at Jobs for the Future (JFF), told BestColleges.

He said this is the fourth version of such a bill, but it’s the most comprehensive version thus far.

“This version takes a very large leap and, in particular, has been the product of listening to critics of previous versions of the legislation,” Pollack said.

ISA providers have also voiced support for the bill.

Purdue University’s Back a Boiler program has been lauded as one of the more influential and high-profile ISAs in recent years. Outgoing Purdue President Mitch Daniels said in a statement that the ISA Student Protection Act “goes a long way” toward filling the gap in federal standards that leave ISAs in a regulatory gray area.

“It is interesting that industry has supported a bill that has moved away from being as industry-friendly as previous bills were,” Pollack said. “I see this as a bit of an olive branch.”

Some advocacy groups have called certain ISAs predatory for charging a high percentage of income for long periods. This can cause some borrowers to ultimately pay more than they normally would under a traditional federal student loan, depending on their yearly salary, Whitney Barkley-Denney of the Center for Responsible Lending previously told BestColleges.

ISAs are most common among online bootcamp enrollees.

Pollack of JFF said past versions of this bill didn’t establish a mandatory framework for consumer protections. Instead, ISA providers could choose to remain under regulatory uncertainty. It could be a risk for these providers, but it would allow them to follow their own models with less oversight.

The new ISA Student Protection Act removes that ambiguity.

Instead, Pollack said, ISA providers must choose one of two paths. They can elect to operate as a more traditional loan provider and follow those guidelines, which rarely suit these agreements. Or, providers may instead follow a framework outlined in the act.

Whatever path they choose, he said that forcing providers down one of two roads means there will be more regulation. It’s also a benefit to the ISA makers themselves since they no longer would need to operate in a legal gray area.

“It creates this system and says they need to be regulated,” Pollack said.

The ISA Student Protection Act would also address advocate concerns that ISAs may take advantage of borrowers through predatory terms. The bill would limit how much ISA providers can charge borrowers and for how long.

First, the bill states that educational ISAs can charge no more than 20% of a student’s future income. It would also force providers to alert a student if their total future payments exceed 20% when also considering other forms of financing like federal or private student loans.

The act also limits how long a borrower can be on the hook for an ISA. Contracts cannot require more than 240 monthly payments, and all ISAs would expire after 360 months, regardless of how much the student had paid.

Perhaps most importantly to advocates, the bill offers protections for low-income borrowers.

According to the bill, borrowers would not need to make payments on their ISA if they would earn less than 200% of the federal poverty line after monthly payments.

Additionally, ISA providers would not be able to charge borrowers making less than 300% of the poverty line more than what they would pay with an 18% annual percentage rate (APR) traditional loan of similar length. Pollack said that provision helps alleviate worries that ISAs could ultimately cost borrowers significantly more than a traditional loan, although the 18% figure is still very high.

“This bill offers a floor of protection,” he said. “States can build stronger protections on top of it.”

This proposal also institutes disclosure requirements for educational ISAs. Most notably, it requires ISA providers to create tables showing borrowers how much their monthly payments would be at different income levels.

The polarized nature of this current Congress means there’s a chance the ISA Student Protection Act fails to pass once again, Pollack said.

However, no matter what happens at the federal level, this version of the act is still a substantial step forward.

Pollack said the bipartisan nature of the proposal shows willingness from both sides of the aisle to find a way to regulate ISAs meaningfully. The support from ISA providers also suggests regulation will come in some form or another soon.

Additionally, he said the act can serve as a blueprint for state legislatures and regulators to craft their own ISA consumer protections.

There has not been too much action at the state level to address the issues concerning ISAs, Pollack said. Some of the ongoing discussions, like rulemaking from the Colorado attorney general, fall short of properly addressing the issue, he opined. The ISA Student Protection Act would give lawmakers a model to follow if they want to institute their own regulations.