Consumer Protection Lawsuit Filed by 47 Former Students Alleges that Vemo Education, Inc. and Make School, Inc. Drove Students to Take On Predatory Debts Potentially Costing More than $250,000 Per Student
July 1, 2021 | SAN FRANCISCO, CA — Today, a group of 47 former students announced a groundbreaking lawsuit against Make School, Inc. (“Make School”), a venture capital-backed operator of a for-profit coding academy, and Vemo Education, Inc. (“Vemo”), the largest provider of a risky kind of private student loan known as an Income Share Agreement (“ISA”). In their lawsuit, Make School’s former students allege that Make School and Vemo jointly engineered a predatory and exorbitantly high-cost ISA program. According to the complaint, the companies actively concealed the actual, long-term cost of an ISA package that could total more than $250,000 when used to finance Make School’s two-year program and associated living expenses. The lawsuit was filed by California consumer protection attorney Melody Sequoia of the Sequoia Law Firm, with the support of the nonprofit Student Borrower Protection Center.
From 2016 to 2018, Make School unlawfully operated as a for-profit college in California, during which time Make School and Vemo pushed ISAs on borrowers in open violation of a California Education Code provision intended to protect borrowers from financial debts issued by unlawfully operating schools. In 2018, a California regulator issued an order requiring the school to refund all money paid by students to Make School during the period in which it operated illegally and to cancel the ISAs engineered by Vemo and Make School. The lawsuit alleges that Make School violated this order by not refunding payments to former students, and that Vemo illegally continues to collect on these students’ unenforceable ISAs. Moreover, the lawsuit alleges that Make School and Vemo actively concealed this order from students and continued to enroll new students and push new ISAs despite being ordered to cease and desist. The complaint further alleges a wide range of additional illegal conduct by Make School and Vemo in violation of state and federal law, including unfair and deceptive lending practices, fraudulent and deceptive marketing tactics, and illegal debt collection practices.
The former Make School students are asking the Court to relieve them and all other current and former students from these illegal ISAs and to issue them refunds.
A copy of the complaint, filed in California Superior Court, is available here: www.protectborrowers.org/makeschoolcomplaint
“The former students bringing this lawsuit are hardworking and talented people, many of whom relocated to San Francisco in hopes of receiving training that would prepare them for high demand tech jobs,” said attorney Melody Sequoia who represents the former Make School students. “Unfortunately, those students fell victim to unfair and deceptive marketing and lending practices that disguised the true cost of the ISA program and Make School’s authority to operate in the state.”
“The Income Share Agreements pushed by Make School and Vemo were sold as shiny new financial innovations but, as today’s lawsuit makes clear, they were nothing more than plain old predatory lending,” said SBPC Managing Counsel Mike Pierce, a former senior regulator for the student loan industry at the federal Consumer Financial Protection Bureau. “Students, schools, and honest lenders all suffer when firms like Vemo and Make School defraud and cheat students just to pad their profits—these abuses must stop and these students deserve justice.”
According to the complaint, Make School and Vemo engaged in a years-long scheme to recruit students and push them to take on high-rate ISAs. These firms allegedly did so using a wide range of deceptive and fraudulent marketing tactics, misleading current and prospective students about the total cost and the economic value of a Make School program and engaging in bait-and-switch tactics that forced returning students to take on more expensive ISAs as they progressed through the program. In addition, Make School allegedly engaged in a scheme specifically targeting veterans, using false statements about eligibility for financial assistance under the GI Bill to recruit these students.
Under the terms of these predatory ISAs, Vemo and Make School required students to agree to repay 20-25 percent of their pre-tax income each month, for three and a half years or more. In the cases of some former students, monthly payments are as high as $2,500 per month. These ISAs also feature a so-called “payment cap”—the maximum amount owed under the ISA and the total amount due should a borrower wish to prepay that is 2.5-3 times the original funding amount of the loan. The former students allege that Vemo and Make School pushed them to take on multiple ISAs to cover the full cost of Make School’s program and associated living expenses— agreements that were scheduled to be repaid sequentially, binding students to repay for years longer than advertised in Make School’s marketing materials. Many students found themselves on the hook for maximum repayment terms as long as ten years, owing maximum amounts ranging from $221,000 to $269,500 depending on when they first enrolled.
An example Vemo ISA primary contract for Make School tuition is available here: www.protectborrowers.org/isacontract
An example Vemo ISA secondary contract to cover Make School student living expenses is available here: www.protectborrowers.org/isastipendcontract
The company’s recruitment targeted economically vulnerable students and students from historically disenfranchised communities. According to information about Make School published by one of its financial backers, among Make School students “40% are underrepresented minority students and 50% come from low income families.”
Founded in 2014 with the backing of major Silicon Valley venture capital firms, including Y Combinator and LearnCapital, Make School purports to disrupt traditional higher education by “[s]ystemically aligning incentives of the [school] with students through Income Share Agreements.” However, instead of living up to its lofty rhetoric, former students allege that Make School partnered with Vemo, the nation’s largest ISA firm, to design a financial product that the school could quickly sell for operating cash, avoiding the long-term financial risk that allegedly aligned the company’s financial interests with those of its students.
Background on Income Share Agreements
ISAs are a risky form of student financing that ties students’ loan payments to their future wages. A growing body of evidence demonstrates that the leading ISA providers routinely engage in a wide range of abuses—a pattern that extends across companies and across the higher education sector. According to Make School co-founder Jeremy Rossmann, Vemo and Make School were “literally the world pioneers in income share agreements.” Many of the abuses highlighted across the industry are among the allegations prominently featured in today’s complaint. For example:
- Relying on Deceptive Marketing. The National Consumer Law Center and the SPBC filed a complaint with the Federal Trade Commission alleging Vemo engaged in a range of deceptive marketing tactics related to Vemo-backed ISAs offered by Purdue University and the University of Utah.
- Servicing and Collecting Void, Unenforceable Debts. Prominent legacy student loan companies may be servicing and collecting on ISAs made in violation of state licensing or usury laws. The servicing or collection of void, unenforceable debts may be an unfair practice in violation of federal and state consumer law.
Other examples of abuses by ISA providers include:
- Engaging in Racial Discrimination. The NAACP Legal Defense Fund and the SBPC demanded ISA provider Stride Funding cease discriminatory lending practices that appear to charge students attending Historically Black Colleges and Universities more than similarly situated borrowers who attend predominantly white colleges.
- Charging Illegal Prepayment Penalties. A review of publicly available ISA agreements reveal that in most cases, ISA providers charge borrowers extremely high prepayment penalties, locking vulnerable borrowers into high-cost subprime credit—a practice common among predatory mortgage lenders in the years before the financial crisis. The federal Truth in Lending Act bans this practice for all private student lenders, including ISA providers.
With the ISA market growing rapidly and companies in the space pushing the product ever more aggressively, consumer advocates have urged federal and state regulators to crack down on these abuses and ensure that ISA companies are acting in accordance with existing laws and regulations.