At Jobs for the Future (JFF), we are encouraged to see the introduction in the Senate of the bipartisan ISA Student Protection Act of 2022, which proposes clear, thoughtful, and much-needed regulations to govern income share agreements (ISA).
ISAs are an outcome-based financing model that ties the amount that learners pay for postsecondary education and training to the amount of money they earn after they complete their programs. As tuition costs and student loan burdens have grown and as many schools fail to produce positive economic returns on students’ investments, ISAs offer significant promise to improve accountability, access, affordability, and equity in the postsecondary education and training system.
However, as is the case with any financial instrument, ISAs may also have potential drawbacks. Learners may have difficulty understanding the terms and conditions they’re agreeing to. ISAs may also lead learners to become overleveraged, especially if they stack an ISA on top of student loans. Many of the same concerns around collection practices in the traditional loan market also apply to ISAs, such as inadequate notice of lawsuits and requiring automatic bank account withdrawals and payroll withholding. These concerns are particularly acute for ISAs because learners’ lack of familiarity with this financial product might lead them to accidentally miss payments. And while recent JFF research suggests that ISAs do not systematically cost more to Black, Latinx, and female students, individual ISAs—like traditionally-structured loans—can pose a risk to equity if not carefully designed.
The Truth in Lending Act and a number of other federal laws and regulations govern traditional consumer lending practices, but additional legislation is necessary because these protections as written do not adequately protect learners who use ISAs.
Currently, the Truth in Lending Act and a number of other federal laws and regulations govern traditional consumer lending practices, but additional legislation is necessary because these protections as written do not adequately protect learners who use ISAs, for a few reasons.
First, it’s unclear whether these protections apply to ISAs and other innovative education financing tools. A recent consent order revealed that the Consumer Financial Protection Bureau (CFPB) believes that ISAs are subject to the Truth in Lending Act, but that assessment could be reversed by future administrations. The consent order was also silent on whether other federal laws also apply to ISAs, and there are few rulings in the courts to provide guidance.
Second, even if it were made clear that these existing federal protections do apply to ISAs, they were clearly designed with the structure of a traditional loan in mind, so it is unclear how ISA providers should comply with them. For example, the Truth in Lending Act requires disclosure of an annual percentage rate (APR), but the APR of an ISA can vary widely from student to student depending on their future incomes. There are a variety of ways that ISAs might comply with these protections, but it’s unclear whether regulators would accept these approaches.
Finally, the fact that ISAs link payments to income creates new opportunities for policymakers to build a greater level of protection than what student loan borrowers experience. For example, there are no protections to ensure that private student loans are affordable. Providers claim that ISA payments will be affordable to students, and new protections are necessary to ensure that ISAs fulfill this promise.
Introduced by Senators Todd Young (R-Indiana), Mark Warner (D-Virginia), Marco Rubio (R-Florida), and Chris Coons (D-Delaware), the ISA Student Protection Act of 2022 broadly applies existing federal consumer protection laws to ISAs, ensures that the guidance provided to ISA providers is clear and takes the specific design of ISAs into account, and creates new protections that the income-based nature of ISAs make possible.
Here’s a look at important highlights of the legislation.
Applying Existing Federal Protections to ISAs
- Disclosure: The ISA Student Protection Act creates a disclosure regime for ISAs that mirrors the structure of the Truth in Lending Act. It directs the CFPB to create a standardized format that ISA providers must use to disclose details of their offerings. The format would require standardized terminology, and providers would have limited ability to customize their disclosures. Notably, it would require ISA providers to create tables that list the payments required at multiple hypothetical income levels. They would also have to provide comparisons of their offerings with traditional loan options. It would also give the CFPB discretion to require disclosure of additional details, such as the APR of ISA repayment plans, if it determines that such elements would help consumers better understand their ISAs and compare them to other available financing products.
- Fair Lending: The legislation also applies existing federal anti-discrimination frameworks to ISAs, and it clarifies that, when regulators assess disparate impact, they should look at the amounts that students ultimately pay rather than the contract terms in isolation.
- Fair Credit Reporting: The legislation applies the terms of the Fair Credit Reporting Act (which govern how consumers’ credit information is collected and used) to ISAs and creates specific reporting rules for ISAs that account for their unique features.
- Preferred Lender Guidance: The bill clarifies that preferred lender rules apply to schools that partner with ISA providers, and therefore the institution and the lender must make specific disclosures to borrowers.
- Protections Against Low-Quality Education: The legislation requires ISA contracts to include Holder Rule language stating that students may have legal grounds to decline to repay their ISA financing if the education or training that the ISA financed is defective or fraudulent, even if the ISA contract is owned by a third party.
- Bans on Abusive Collections: The bill applies the Fair Debt Collection Practices Act to ISAs. It also prohibits ISA providers from drawing up contracts that include acceleration clauses—which allow providers to convert an existing ISA into a debt balance if the student defaults.
Creating New Protections for ISAs
- Monthly Affordability: The bill stipulates that ISA contracts must set income thresholds high enough that a student’s remaining income would not be under 200 percent of the federal poverty line after monthly payments. And to prevent students with high levels of student debt from adding additional ISA liabilities, the bill also requires an additional disclosure cautioning students not to enter into ISAs if their total monthly educational financial obligations, including private or federal student loans, would exceed 20 percent of their future income.
- Total Affordability: The legislation would not allow ISA contacts to require more than 240 monthly payments, and it would require them to automatically expire after a maximum of 360 months (30 years), regardless of how much the student had paid over the life of the contract.
- Additional Low-Income Protections: While there is no universal cap at the federal level on the amount that private students loans charge borrowers, this bill would require that the amount ISAs charge low-income students (defined as those earning less than 300 percent of the federal poverty level) over the life of the ISA cannot exceed what they would pay with an 18 percent APR traditional loan of similar length. And while traditional student loans can only be dischargeable in bankruptcy if the borrower can show “undue hardship,” this legislation would make it easier to discharge ISAs by applying the same standard that applies to other consumer debts.
- Payment Pauses: The legislation requires ISA providers to offer low-income students at least three months of voluntary payment relief pauses for every 30 income-determined payments made under the ISA, which students can take even if their earnings exceed the income threshold.
The ISA Student Protection Act of 2022 is a thoughtful approach to ISA regulation that simultaneously offers students greater protection than they would receive under current lending laws and gives providers greater clarity and certainty.
Versions of this bill have been introduced in each of the last four congressional sessions, beginning in 2015, but none has been passed into law. Each version has built on the previous one, incorporating more and stronger consumer protections. But this version has taken a giant leap forward compared to the one introduced in 2019, incorporating the views of a diverse group of stakeholders to create a universal regulatory framework and improve integration with existing federal loan protections.
The ISA Student Protection Act of 2022 is a thoughtful approach to ISA regulation that simultaneously offers students greater protection than they would receive under current lending laws and gives providers greater clarity and certainty. It intentionally considers and values the critiques of and concerns regarding ISAs and envisions a market for outcome-based financing options where students are protected. We hope that Congress gives it due consideration.
Moreover, whether or not Congress passes this bill, we believe it can serve as a useful model for state policymakers on how to design thoughtful protections. A federal baseline level of protection and additional protections at the state level would ensure that ISAs promote learners’ interests and advance accountability, access, affordability, and equity in the postsecondary education and training system.