By Dan Cohen, Emily Rosenman, Tom Baker | August 23, 2022
On September 7th, 2021, the Consumer Financial Protection Bureau (CFPB) took action against the Income Share Agreement (ISA) provider Better Future Forward for “falsely representing that its ISAs are not loan products and do not create debt.” Finally, it seemed, a regulatory agency was holding ISA providers to account, stating that ISAs are in fact debt, and potentially reining in some of the more predatory aspects of the industry.
One year later, ISAs are back on the agenda. A new Senate bill, the ISA Student Protection Act, proposes a regulatory framework that would allow the use of ISAs to grow. Despite the CFPB’s clear assertion that ISAs do constitute debt, the press release announcing the bill included numerous quotes positioning ISAs as, in the words of Senators Rubio and Young, a “debt-free financing option for students.” In this, the Senators are repeating the claims of numerous ISA companies, made before the CFPB’s 2021 action, that ISAs are a less expensive and less risky way of financing higher education than traditional student loans.
In a recent study, we analysed how ISAs relate to changes within the American higher education system and the emergence of new financial technologies (often referred to as “FinTech”) that enable the creation of individualized debt products. Based on a review of various ISA structures and research on the workings of the ISA industry, we argue that, rather than a progressive alternative to student loans, ISAs are better characterized as a process described by Seamster and Charron-Chénier (2017) as predatory inclusion, “whereby members of a marginalized group are provided with access to a good, service, or opportunity from which they have historically been excluded but under conditions that jeopardize the benefits.”
Below we outline some of these predatory aspects of ISAs.
‘Inclusion’ into a Deeply Unequal Education System
Like student loans, ISAs exist because of the failure to provide adequate public funding for the education of marginalized students and to regulate predatory institutions of higher education. These failures have led to the student debt crisis, driving students to take on debt products like ISAs, which restrict students’ economic prospects after graduation.
One difference between ISAs and traditional student loans is the type of students that ISA companies often target. On the whole, ISAs do not appeal to financially empowered people with middle-class upbringings. Other funding options–public and private–exist for them.
Instead, ISAs are often framed and marketed toward people excluded from an already deeply unequal education system by virtue of public underfunding and racially patterned income and wealth disparities. Our research suggests that the very existence of ISAs depends on the continuation of these inequalities.
We found that ISAs are most prevalent at for-profit vocational schools that target marginalized populations excluded from economic opportunities. It is not a coincidence that coding boot camps offering ISAs such as Holberton exist in the Bay Area. People left out of economic growth, but who can see the wealth around them, are specifically targeted by advertisements for ‘debt free’ education which entice students into signing complex ISA contracts. As various legal proceedings brought by ISA borrowers have shown, many have come to regret the conditions of these contracts.
Airbrushing New Forms of Debt
ISA firms leverage the promise of pairing zero upfront tuition with an income-based repayment plan to promote their products as an ostensibly progressive alternative to debt. Through doing so they airbrush the regressive and predatory features of ISAs from public and political debate.
Touted as an innovative solution to the student debt crisis, ISAs are often promoted as having a positive social impact precisely because of whom they primarily target: marginalized students who are wary of taking on a large debt burden and who usually attend unaccredited, for-profit schools that are ineligible for subsidized federal loans. As we note above, ISAs’ very existence depends on the perpetuation of inequalities created through an underfunded education system and labor market already stratified by race, gender, ability, and other areas of social difference. But by promoting ISAs as a “debt alternative,” the ISA industry has largely avoided being associated with the deeply inequitable characteristics of student debt, which disproportionately burdens women and people of color.
Exploitative and Opaque Terms Enabled by Financial Technologies
Because ISA borrowers are typically students with relatively few options of accessing higher education, ISA firms and intermediaries have the upper hand, empowering them to set potentially exploitative terms.
While the precise structure of an ISA varies, our review of the terms and financial structures of various ISA providers showed that the risk associated with each student’s ability to repay the ISA is the basis of a contract between investors and students. The risk the ISA provider determines a student poses informs key aspects of the student’s agreement, including the amount of financing awarded and the rate of repayment.
Unfortunately, the methods used to assess risk by ISA firms are often hidden and considered proprietary. This is especially the case for FinTech ISA platforms, which use algorithmic assessment to determine risk.
Looking at more transparent ISA offerings, such as the recently-ended Purdue University Back a Boiler program, we observed that students receive differential treatment according to the decisions made by the ISA provider. Purdue’s program, funded by prominent ISA firm Vemo Education, determined ISA repayment rates based on (1) the student’s major area of study (sciences generally received better rates than humanities), (2) current year of program, and (3) amount borrowed. This produced a significant variation in rates: a difference of over three times between the lowest (1.74 percent) and highest (4.97 percent).
Many ISA providers are far less transparent and it is commonplace for ISA agreements to include contractual fine print that would likely surprise even the most diligent borrower. As documented by groups like the Student Borrower Protection Center, ISA lenders often require students to waive their rights to jury trials and class actions, to provide terms that result in students paying amounts that far exceed those of conventional student loans, and to undertake unethical practices such as requiring complete access to student’s bank accounts.
In such systems, implicit bias will be baked into the system’s operations.
In cases where ISA providers rely on proprietary and non-transparent algorithms to generate risk scores and associated loan terms, additional issues regarding technologically fuelled biases and discrimination abound. For example, in filings at the SEC, the ISA firm Avenify (acquired by Edly in January 2022) outlined that “[soon] investors will be able to view a more comprehensive student profile, including short-answer questions and career plans.” In such systems, implicit bias will be baked into the system’s operations. Other ISA platforms such as Edly have also promised further revenue-generating strategies that can be built on the ISA model, using the ISA relationship to promote other debt and financial products.
The concerns we highlight potentially apply to best-case scenarios. However, lawsuits documenting students’ experiences with existing ISAs show that worst-case predatory lending is disturbingly prevalent in the ISA industry.
Further, concerns around discrimination in risk assessment are, notably, not well addressed in the proposed ISA Student Protection Act. Indeed, algorithmic methods are considered non-discriminatory as long as they are “statistically sound and reasonably designed” to not discriminate on the basis of race and other protected classes. However, in the context of wider carve-outs within the bill that allow the consideration of correlated factors such as receiving public assistance or educational program in determining rates, there are serious concerns about discrimination even within a regulated ISA market. We argue that such concerns are built into the ISA model and its determination of risk at the individual level.
ISAs are often marketed by both politicians and ISA providers as a win-win for students and investors: practical, responsible, and ethical investments. The reality of ISAs, however, reveals a more predatory debt relationship.
ISAs offer negative value for students that cannot be regulated away. Instead, ISAs at their core, are enabled by a systemic failure of the higher education system which ISAs do not solve but, instead, worsen through the individualized nature of the ISA debt instrument. As we have shown:
- ISAs have only emerged as student debt became a crisis and as public education funding has continuously fallen. This scenario produces a situation where marginalized students, especially, are driven towards predatory debt instruments like ISAs because they are wary of–or do not qualify for–traditional student loans.
- While ISAs promote this extension of debt to marginalized populations as evidence of their progressive impact, it is instead evidence of the social and geographic-specific environment of economic exclusion that drives marginalized students to ISAs.
- Existing uses of ISAs have been revealed as highly predatory, working to the disadvantage of students who often pay more than they would with a conventional student loan.
- ISAs raise serious concerns about discrimination since opaque methods of calculating risk at the student level are built into the structure of how they function as individualized debt instruments.
Dr. Dan Cohen is an assistant professor of Economic Geography at Queen’s University in Kingston, Ontario. His work examines the construction of new market systems in education and their effects on geographic inequality.
Dr. Emily Rosenman is an assistant professor of Geography at Penn State University. Her work in urban and economic geography examines the use of private and humanitarian finance to govern social services.
Dr. Tom Baker is a Senior Lecturer in Human Geography at the University of Auckland, Aotearoa-New Zealand. His research examines the politics and practice of social and economic governance.