June 26, 2026
JFF does a deep dive into a new bipartisan bill introduced in the U.S. House and Senate that aims to provide consumer protections and regulatory guidance for the outcomes-based financing market.
At Jobs for the Future (JFF), we are encouraged to see the introduction of the Outcomes-Based Financing for Students Act of 2026 in the U.S. Senate and the House of Representatives. The proposed legislation would fix the outdated regulatory treatment of outcomes-based student financing (OBF), making it easier for responsible providers to offer this innovative model while giving students better protection from predatory ones.
Passing this legislation and providing learners with more options for paying for higher education is particularly important in light of new limits on federal student loans that take effect July 1 under the One Big Beautiful Bill Act (OBBBA). The law caps Parent PLUS borrowing, eliminates the Grad PLUS loan program, and reduces federal borrowing limits for part-time students, both undergraduate and graduate.
A JFF analysis found that about 10% of students will face new financing gaps once the limits take effect. Many will turn to private loans, but those with weak personal and family credit history may struggle to qualify—or may only qualify at dangerously high interest rates. And unlike federal loans, most private loans require fixed monthly payments and offer limited protections for borrowers with low incomes. That means a period of unemployment or underemployment can quickly turn a manageable loan into a financial albatross.
As federal loan changes could push many students to seek financing options in the private lending market, we must ensure that student-friendly alternatives to traditional private loans are available.
OBFs, which can be structured as either outcomes-based loans or income share agreements, differ from traditional fixed-payment loans in that a student’s payment is based on what they earn following their education. If their earnings fall below a set threshold, they won’t be required to pay anything, and if their low earnings persist, their financial obligation will simply expire after a specified period of time. In addition, OBFs tend to be more accessible to students with poor credit scores because the underwriting focuses more on future income—the outcomes of the educational programs—than on income at the time of their application.
In addition to helping students supplement federal loans for traditional college or university programs, OBFs can also serve as a primary student financing option for short-term skills training programs, which are often ineligible for federal loans. They can also complement Workforce Pell grants.
The potential advantages of OBFs are not mere speculation; they’re grounded in evidence. A growing body of research confirms that they can provide a more accessible and affordable financing option for many learners. Last year, research found that two-thirds of students in Purdue’s Back a Boiler program paid less than they would have paid in a comparable fixed-payment loan, with low-earning students the biggest beneficiaries. Multiple studies have found no evidence of OBFs creating disparate impact by race, while there is substantial evidence that fixed-payment loans do indeed disadvantage legally protected racial groups. Studies have also found that students, on average, highly value the low-wage protections that OBFs offer.
Unfortunately, the existing tax and regulatory rules were built for fixed-payment loans, not for outcomes-based student financing. Consequently, OBFs are hampered by an uncertain and confusing tax and regulatory environment, limiting their potential to scale and serve more students. Moreover, because existing consumer protections are not specifically designed for the unique structure of OBFs, they fail to provide adequate protection from bad actors who prey on students rather than serve them.
Introduced by Sen. Todd Young (R-Indiana), Sen. Mark Warner (D-Virginia), Sen. Chris Coons (D-Delaware), Rep. Erin Houchin (R-Indiana), and Rep. Ritchie Torres (D-New York), the Outcomes-Based Financing for Students Act of 2026 updates existing federal consumer protections to better suit OBFs, creates new protections for students using OBFs, and ensures clear guidance for OBF providers.
OBFs are intended to charge students for the value of the education they receive. If their education fails to lead to a job with an income over a set threshold, they are likely to pay little, and perhaps nothing. But this outcome may trigger a hefty tax bill if the IRS considers it a taxable loan forgiveness event. It would be perverse to tax these low-income students on value they never received.
The bill clarifies the tax treatment of OBFs, ensuring that borrowers won’t be taxed at the end of their financial obligation if their payments fall short of the amount financed.
Current disclosures required by the federal Truth in Lending Act (TILA) were built for fixed-payment loans and are not well-suited for OBFs. For example, TILA requires disclosure of an annual percentage rate (APR), but the APR of an OBF can vary widely from student to student depending on their future incomes.
The bill amends TILA to include unique disclosure guidelines for OBFs, requiring standardized and conspicuous disclosures of certain OBF-specific terms as well as an income scenario table that shows borrowers what repayment could look like at different income levels, including APR estimates.
OBF providers lack clear rules for how to report to credit bureaus, harming students’ ability to build credit.
The bill defines credit reporting regulations for this type of financing, including what information must be included in reports to consumer reporting agencies, such as contract terms and amount owed. Having this clarity can help students build credit as they make payments on their OBF.
Fair lending laws may inadvertently deter OBF providers from using an education program’s outcomes to determine whether to offer an OBF to students in that program and, if so, at what contract terms. At the very least, these laws may prevent OBF providers from differentiating contract terms across institutions and fields of study, which could result in a de facto subsidy of poorly performing programs, running counter to the goal of OBFs guiding students toward high-performing programs. In fact, fair lending laws may inadvertently require OBF providers to offer financing to predatory schools, thereby perpetuating harm to students.
The bill clarifies that if OBF providers underwrite based on a specific set of outcome metrics (such as graduation rates or post-enrollment earnings), that action in and of itself does not constitute a violation of fair lending laws. This measure would preserve the goal of OBFs and increase accountability for education programs.
Tools are neither inherently good nor inherently bad; their value depends on how they’re used. Hammers, for example, can be used to build a house, but they can also be used as a weapon. OBFs are no different. They can be used by good actors to benefit students, or by bad or irresponsible actors to harm students. OBFs can be more affordable and accessible than fixed-payment loans, but additional consumer protections are needed to ensure they are designed and operated in students’ best interests.
The bill creates new consumer protections for OBFs based on their distinct structure and affordability goals. The provisions include:
The Outcomes-Based Financing for Students Act of 2026 is a thoughtful improvement to the tax and regulatory treatment of outcomes-based student financing. Passing this legislation would leverage private-market innovation to improve affordability, accountability, and access in the postsecondary education system, while providing students with far greater protections than currently exist in the law. We hope that Congress gives it due consideration.
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