Income Share Agreements for Higher Education Get a Rebrand

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Last year, New Jersey launched its Pay It Forward Fund, money that gives interest-free loans to students in certain training programs that they then pay back at a rate tied to their post-graduate income.

The garden state referred to the initiative as “outcome-based loans” or “pay-it-forward funds,” but they share remarkable similarities with income share agreements that have earned themselves a bad name in recent years.

New Jersey’s Pay It Forward Fund launched in partnership with Social Finance, which describes itself as “a national impact finance and advisory nonprofit. We work with the public, private, and social sectors to build innovative partnerships and investments that measurably improve lives.” Social Finance’s partners include Google, Walmart, Prudential, Bank of America, and Fidelity.

While New Jersey attempts to put a respectable veneer on such “outcome-based loans” through its partnership with a nonprofit, the terms of the agreements are not dissimilar to private companies who have been gouging students with income share agreements in recent years.

Courtroom arguments between a loan company, students, and the Consumer Financial Protection Bureau (CFPB) are also shedding light on this new chapter in US feudalism.

The now-bankrupt company is Prehired, which promised to train students for 12 weeks for software jobs in return for a portion of their future paychecks. Last year, the company sued 280 of its former students seeking $25,000 from each. The lawsuits have been moved to arbitration, but the CFPB is now requesting that a court negate the so-called income share agreements.

Prehired is a small player in the income share agreement (ISA) industry. While they originally began at tech training schools where students are ineligible for federal student aid, they have recently begun to be offered to community college and four-year university students. Last year, the Department of Education said it considers ISAs private student loans, which should be subject to the agency’s rules for schools’ deals with lenders, but that mission is still murky since the stated goal is simply “making higher education more accessible and affordable.”

It isn’t so much that the Department of Education or the CFPB are anti-ISA, they just want to make sure the serfs aren’t being treated overly unfairly. From MarketWatch:

The CFPB’s claim, which was joined by 11 states, alleges Prehired violated consumer protection laws by luring students into signing up for income share agreements with misleading information and aggressively pursuing them to collect on these deals. While much of the complaint is focused on Prehired’s extreme alleged conduct, like the lawsuits against former students, the Bureau also alleged the company broke the law by advertising its ISA agreements as something other than debt and by failing to include disclosures that are required to come with a lending product.

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The concept of ISAs has been around for decades. Milton Friedman was a major proponent of forcing students to pay a percentage of their post-schooling income in order to finance their education.

A definitive estimate of the total value of the ISA market is hard to come by, but the RAND Corporation reported the value of new ISAs at roughly $300 million in 2020 and the total number of ISA-offering institutions or programs at around 60. At the four-year universities that offer ISAs, some students are turning to them as “last dollar” options to fill in shortages after grants and federal loans.

Like so many “innovative” products in our society today, the ISAs began to take off in the world of tech, specifically Silicon Valley coding boot camps, which weren’t eligible for federal financial aid. So they did what they always do: they innovated!

And what’s not to love? It’s based on income level just like Biden’s student loan forgiveness plan or his new income-driven repayment plan.

Of course, ISAs can ultimately hold down students economically even more than traditional student loans. From Inside Higher Ed:

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…

Few of those who provide ISAs wanted to talk to Inside Higher Ed. They fear more scrutiny from the Education Department.

Fearing any government scrutiny is usually a good sign that all is on the up and up. The limited oversight coming from the CFPB and Department of Education has put a damper on the growth of ISA companies, at least for the moment.

Some companies have recently gone out of business, such as Vemo Education, which had partnered with Purdue University (undergrad enrollment of 37,000+) to offer ISAs in a program dubbed “Back a Boiler.” More from The Hechinger Report: 

Intrigued, other university leaders wanted in. “We’re looking at what Purdue University is doing now, and we are thinking about it,” said Sheila Bair, then president of Washington College. In subsequent years, Purdue’s program won a think tank’s award for most innovative public policy proposal, and at least 14 other colleges or universities launched their own programs.

So Purdue’s announcement in June that it was suspending the Back a Boiler program came as a thunderclap in the world of income-share agreements, or ISAs, and could signal the beginning of the end of experiments involving college students splitting their future paychecks with investors.

The number of schools offering ISAs is sliding down the far side of the bell curve as several other accredited colleges or universities have ended or paused their programs. It’s a sign of fraught times for these schools and for the training boot camps that offer ISAs, with lawsuits mounting, federal and state governments imposing restrictions and students reporting mixed satisfaction.

Vemo’s going out of business coincided with several lawsuits being filed by former students over deceptive business practices and false advertising. Some students at for-profit coding boot camps had signed contracts under which they owed as much as $270,000.

Maybe more importantly is the Department of Education’s pressure on universities telling them they must treat ISAs as loans, which causes administrators to worry about federal scrutiny. According to The Hechinger Report, pressure from the DOE and CFPB “interrupted the Purdue Research Foundation’s conversations with investors about an additional round of ISA funding, and Purdue decided to pause the program.”

Still, it might be too soon to proclaim the end of ISAs on campus. Venture capital and private equity firms are pouring money into ISA companies, such as Hangar backing the ISA provide Outcome Group. An online marketplace, Edly, thinks it has found a solution to bring in even more Wall Street investors:

As schools reach for third-party capital to fund their ISAs, private investors appear to be eager to take on some of that risk, too—as well as the potential returns. …

Schools ranging from for-profit, unaccredited coding boot camps to nonprofit universities can list shares of their students’ ISAs on the platform. Accredited investors (which the SEC defines as a person whose income exceeds $200,000 or has a net worth more than $1 million) can create an account on Edly, where they can view the offerings and pick their investments.

On the Edly website, prospective investors can see information such as the school’s graduation rate, average salary and other variables provided by the institution. Schools can pool their ISAs by program, whether that’s STEM or humanities majors, or a cybersecurity program at a coding boot camp. When investors find a pool of ISAs they like, they can purchase Edly notes, which represents fractional ownership in an ISA.

The Manhattan Institute argues that higher education should function like equity investments because what could be a better system for higher education than the wealthy picking and choosing students to bet on like a day at the tracks?

For risky, unsecured investments in the private market, debt is not the optimal financial tool. Rather, the first investments in startup businesses and other risky assets occur through equity finance. Unlike debt, equity investments have no balance or interest rate, so the recipient of the investment is not obligated to pay back a set amount. Instead, the investor takes an ownership stake in the asset, and his return rises and falls with the asset’s performance….

While an investor takes on more risk for each individual student, financing several ISAs can actually reduce investors’ losses relative to traditional student loans. This is because high-earning students cross-subsidize the losses that investors suffer on low-earning students.

Should the CFBP and DOE scrutiny lead to tighter regulation of ISA companies, it would likely benefit them in the long run by giving them the government stamp of approval.  Here’s a bullish piece at Forbes penned by a University of Utah student and edited by the university’s Sorenson Impact Center staff, which helped develop the ISA program at the university:

For students seeking private ISAs, the CFPB decision means they can count on the same protections granted to traditional student loan borrowers.

For private ISA providers, the CFPB decision means disclosing information they may not have been calculating or tracking. Some ISA providers are still struggling to adapt, while others were more ready or even welcomed additional regulation.

The University of Utah ended its ISA program in June because of a lack of interest, but that’s not deterring the RAND Corporation, which believes that all that is needed are some minor regulations here and there to smooth out the rough edges and make ISA peonage more palatable. For example, RAND comes up with the following recommendations to standardize disclosures:

• require that a sample contract be publicly available

• specify that overview documents must include income percentage, income threshold, repayment term, repayment cap, tuition cash price, and at least one anchor example

• require that documents be written at a 6th- to 8th-grade reading level

• require balanced and complete presentation of benefits and downsides

• prohibit language that mischaracterizes the ISA or the type or extent of the ISA financial obligation

• provide examples of clear language that explains ISA repayment and key terms

• ensure that targeting language is informative rather than predatory

• require that expected earnings statistics are appropriately sourced, labeled, and explained

• require that institutions provide program specific data, such as graduation rate and earnings, to allow learners to understand their likely repayment scenarios under an ISA. Title IV institutions could access such data through the College Scorecard

Additionally, RAND argues that making ISAs more available is necessary to make higher education more “equitable.”

ISAs have the potential to benefit learners from historically underserved groups, such as those who are Black, Hispanic, or experiencing low income. For example, a key benefit is that ISAs can enable greater financial access to postsecondary education—and thus to higher-earning jobs.

ISAs have the potential to overcome some of the challenges that can prevent learners—particularly underserved learners—from pursuing and completing postsecondary education. ISAs exist in a legal gray zone, and we know little about how they function in practice….

The specific limits policymakers set on ISA terms should be informed by the purpose of the regulation. For example, if the intent of the repayment cap is to ensure that monthly payments are affordable for learners, focusing on income percentage is logical.

ISAs could soon be just another peonage option alongside traditional student loans that help make college “affordable” and provide “access” – just another respectable innovation among so many in education.

Here’s the system our overlords were able to come up with for nonprofit guarantors in the student loan industry rather than free college:

Who knows what convoluted plan the education nonprofits and government will come up with to make ISAs respectable. It sure seems like they could just skip all the bells and whistles and Congress could pass an official return-to-serfdom act whereby the great landlords are assured that others will work to enrich them and while being held down, legally and economically.