By Mike Pierce and Tamara Cesaretti | March 30, 2021
During COVID, a student financing option called an Income Share Agreement (ISA) has received increased attention, as schools and companies offering these products promote them as an “innovative” response to the pandemic. Yet despite proponents’ claims that these financial products can “overcome the student loan crisis” by “aligning incentives” between students and schools, these products instead display many of the hallmarks of predatory lending.
Today, the SBPC released a new analysis of a sample of ISA contracts offered by some of the largest ISA providers in the student financing market. What we found was cause for alarm. Despite representations by lenders that ISAs are “not a loan or credit,” our analysis concludes that a typical ISA is clearly both “credit” and a “private education loan” as defined under the federal Truth in Lending Act.
When an ISA provider claims to not offer “credit” or “a loan,” this should be a warning to students, families, and honest colleges that this lender believes it is above the law.
The Truth in Lending Act, or TILA, is a key consumer financial law that protects borrowers from dangerous business practices by lenders, including banks and other mortgage lenders, credit card issuers, and private student lenders. When an ISA provider claims to not offer “credit” or “a loan,” this should be a warning to students, families, and honest colleges that this lender believes it is above the law—that it doesn’t need to offer the same basic consumer protections in place for many other types of consumer credit.
Our analysis reveals that dire warnings from scholars, former regulators and enforcement officials, and consumer advocates were on the mark about the risks of ISAs. ISA providers appear to ignore one of the central protections guaranteed by TILA to millions of borrowers with private education loans and high-cost mortgages—the protection from so-called “prepayment penalties.”
Students, particularly those who may be drawn to ISAs, share many of the same characteristics as families drawn into subprime and high-cost mortgages a decade ago.
These borrowers may have thin or no credit and may be unable to access a creditworthy cosigner—effectively locking them out of the traditional “prime” or “superprime” private student loan market. These borrowers may have been tricked into taking on risky and untested financial products, potentially as an act of financial desperation. They may be relying on dubious promises that ISAs are “a debt free alternative to a student loan” or on deceptions about the costs of these financial products.
As our new analysis concludes, the ISA industry is routinely and openly breaking the law.
Regardless of how or why potentially vulnerable students are driven to take on an ISA, the inclusion of a prepayment penalty in the loan contract ensures a borrower’s decision cannot be undone without paying a heavy price. As a result, this high-cost credit will remain a constant in their economic lives over years or decades.
Congress stepped in to ban prepayment penalties for private student lenders and high-cost mortgage lenders for precisely these reasons—to protect potentially vulnerable borrowers from predatory lending and to ensure honest lenders can compete to offer consumers the best possible deal. In effect, prepayment penalties discourage borrowers from refinancing high-rate debt as borrowers’ credit improves, interest rates fall, or the products available in the marketplace change.
Prepayment penalties keep ISA borrowers trapped in expensive credit—exactly what the law prevents
ISA providers’ evasion of the law is not limited to a single contract term or deceptive marketing scheme. In addition to the prohibited lending practices revealed in SBPC’s new analysis, ISA providers also face allegations of discrimination, and warnings that they unlawfully deprive students of the ability to protect themselves from fraud.
This approach is central to the ISA business model—the underlying product cannot comply with consumer law and be economically viable for lenders. ISA providers know that if they are regulated as credit, “then there are serious compliance issues for ISA providers for TILA, ECOA, and FCRA purposes.”
As our new analysis concludes, the ISA industry is routinely and openly breaking the law.
These abuses demand immediate action by the Consumer Financial Protection Bureau, the federal agency that administers TILA; state attorneys general and regulators, each of which can enforce TILA; and the U.S. Department of Education, which has oversight and enforcement authority with respect to schools that offer ISAs or enter into “preferred lender” arrangements with ISA providers.
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Mike Pierce is the Policy Director and Managing Counsel at the Student Borrower Protection Center. He is an attorney, advocate, and former senior regulator who joined SBPC after more than a decade fighting for student loan borrowers’ rights on Capitol Hill and at the Consumer Financial Protection Bureau.
Tamara Cesaretti is a Counsel at the Student Borrower Protection Center. She joined the SBPC after developing a passion for ending the student debt crisis while working as a civil rights policy advocate at the intersection of economic justice and educational opportunities.