By Ben Kaufman | April 26, 2021
Income share agreements are a risky but increasingly prominent financial product used to pay for higher education. Under an ISA, borrowers agree to give up a predetermined portion of their income after graduation in exchange for funding they can use toward tuition and other educational expenses. Slick marketing and industry hype have created the perception that ISAs are an attractive arrangement for all parties involved—and their popularity has grown as a result. However, as we have written elsewhere, the ISA business model depends on questionable and possibly illegal conduct. This behavior includes firms’ use of deceptive business practices, reliance on disparate impacts that harm students of color, and—most importantly—insistence that ISAs do not need to comply with federal and state consumer protection laws. As borrowers have looked to rebound from the economic fallout associated with the COVID-19 pandemic, the risks associated with ISAs have grown only more acute.
Unfortunately, without action by regulators like the Consumer Financial Protection Bureau (CFPB), it is clear that the situation will get worse and that borrowers will be at risk. In particular, while ISAs are often associated with for-profit coding bootcamps and have traditionally been available through only a handful of Title IV schools and non-profit organizations, the practice of building credit products with income-based repayment features and subsequently attempting to evade consumer protection law is showing signs of rapid expansion. Without critical intervention by regulators, particularly by the CFPB, the industry’s march will lead ISAs to be the next chapter in the long history of predatory lending. If that happens, an increasing number of borrowers will be trapped in misleadingly marketed and illegally structured financial products along the way.
Recent concerning developments in the ISA space include the following:
- Tech industry ISAs are expanding beyond programs that focus on coding. ISAs are best known for their connection to companies purporting to train students for lucrative careers in software engineering. These firms are dubious enough on their own, but they no longer represent the full universe of companies offering ISAs. In particular, firms are increasingly peddling ISAs for programs purporting to prepare students for two other varieties of work: jobs as non-engineering roles at tech firms, and roles as skilled laborers in areas that require professional certification:
- The ISA industry is expanding its illegal practices into job training for the non-engineering side of tech. Where bootcamps offering ISAs historically offered training for jobs in engineering roles at technology companies, firms are now marketing ISAs for courses purporting to prepare students for careers in tech sales, digital marketing, and even venture capital investment—all aspects of the non-engineering side of the tech industry. Early signs indicate that the encroachment of ISAs into this area of tech may be an effort to carry the ISA industry’s lawless practices into a new realm. This is particularly ironic given that the emerging trend of ISAs for non-technical bootcamps includes those for programs focused on topics related to the financial technology sector. For example, some of these companies appear to be targeting veterans, others boast celebrity endorsements, and most promise six-figure salaries at world-leading tech companies upon graduation. Like coding bootcamps, however, there is little proof that these companies’ claims are grounded in reality. One tech sales bootcamp, for example, is named “AlwaysHired,” hinting at a 100% graduate employment rate for which no proof is offered. If these firms’ promises prove to be false, as has been the case all too frequently for coding bootcamps offering ISAs, borrowers could be left saddled with unaffordable credit.
- The ISA industry is rapidly expanding its reach in the area of skilled trades. ISAs used to finance attendance at programs aiming to train workers for jobs as welders, machinists, nurses and other roles requiring professional certification are becoming increasingly prevalent as industry looks to capitalize on efforts by those who lost jobs during the pandemic to re-enter the workforce. For example, a recent report indicated that one organization offering ISAs to vocational programs such as trucking schools intends to “double” the number of job institutions it supports in the next year. If history is any guide, this could end in serious borrower harm. When the last recession hit, millions of displaced workers went back to school in the hopes of securing a new career, only for the subsequent decade to be dotted with school closures, lawsuits, and broken promises. In the end, hundreds of thousands of students were saddled with billions of dollars in unaffordable student loan debt for worthless degrees. Given the lack of oversight of the types of firms currently claiming to offer a pathway back to employment through an ISA-funded credential, there is every reason to be concerned that the history of false claims by job training programs with massive financial fallout for borrowers could already be repeating.
- ISAs are available for more than just student loans. Despite their extensive risks and shaky legal standing, ISAs are spreading into other areas of consumer finance. For example, one company, Align, advertises its ISAs as being the equivalent of personal loans applicable “for any cash need, whether it’s consolidating debt, paying a medical bill, or planning your wedding.” Unsurprisingly, the company also represents that its products are not loans or a form of credit, illustrating that the growth of ISAs outside of the context of student lending will simply involve the industry spreading its dubious tactics to other markets. Another, Big League Advance, offers minor league baseball players cash today in exchange for a negotiated percent of their income if they make it to the major leagues. Like Align, Big League Advance describes its product as “capital – not loans.” And as the scale of investor interest in the ISA space has accelerated in recent years, other firms have joined in. For example, the startup Defynance opened for business in 2018 as a specialty lender of student loan refinancing products. Defynance prominently advertises that the ISAs it markets to investors are “not a loan” and represents that those who refinance with their ISA are subsequently “Debt Free.” Should this be indicative of what’s to come, the ISA industry’s creep into other credit markets beyond student lending will bring alongside it all the same illegal behavior that it has historically relied on.
While regulators have remained silent, the ISA market has flourished. For as long as this continues to be the case, borrowers will be at risk. It’s time for the nation’s top consumer watchdog to call ISAs what they are—loans that fall squarely within the legal definition of loans and credit—and to hold companies to account for violations of consumer protections. Because if regulators don’t prevent the consumer harm that pervades the ISA market from becoming even more widespread, they will soon find themselves tasked with cleaning an even greater mess.
Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.