Income-sharing agreements in search of legitimacy

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Income Sharing Agreements (ISAs) were developed over 60 years ago by Milton Friedman, but the funding instrument is still trying to establish its legitimacy.

Why is this important: ISAs, which allow borrowers to get cash up front and repay it later through a portion of their future income, have been hailed as a solution to the college debt crisis.

  • Proponents argue that ISAs not only better align incentives between schools and students, but also help graduates avoid debt if their degrees don’t lead them to lucrative careers.
  • Critics, however, say they don’t have the right protection for borrowers and can lead to unfair repayment charges.

Driving the news: Two organizations that issue and manage ISAs recently decided to comply with lending regulators, noting their actions are a positive step for the industry.

What they say : “We do not agree with their conclusions, but we really believe that [CFPB] is the right entity to regulate this, and we think it’s important to work with them, ”Better Future Forward Founder and CEO Kevin James told Axios.

How it works: “Coding bootcamps” – programs that aim to teach basic computer programming skills to students – have adopted ISAs.

  • Many say ISAs make their programs accessible to students without the means to pay upfront while providing incentives for schools to ensure graduates are professionally successful.
  • Some colleges, like Purdue University, have also started offering ISAs as an alternative to traditional loans.

Yes, but: ISAs still operate in a regulatory gray area.

  • Laws governing lending (like the Truth in Lending Act) generally do not deal specifically with ISAs, leaving companies and regulators to interpret their application.
  • This leads to disagreements. For example, while the CFPB viewed Better Future Forward ISAs as loans, the organization views them as a separate type of legal obligation. Still, James says he looks forward to working with CFPB on enforcing their ISA loan disclosure requirements in the future.
  • State and federal lawmakers have introduced various bills, but little further action has been taken.

What’s more, ISAs have been criticized for being predatory and forcing borrowers to repay an unfair portion of their income.

  • “It was difficult for the consumer to really know if it was a good deal or a bad deal,” Upstart co-founder Paul Gu told Axios. His business was initially a marketplace for ISAs before turning to traditional lending.
  • Part of this is because borrowers cannot predict their exact future income and will end up “overpaying” if they do very well.

The bottom line: As the interest in ISAs does not wane, lawmakers and regulators will no longer be able to ignore them any longer.


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