Regulatory Clarity Could Transform the ISA Market
Clear and thoughtful guardrails could signal increased opportunities for learners and ISA providers
As short-term credential programs and accelerated training providers proliferate across postsecondary education, financing tools are needed to expand access, ensure costs are affordable, hold programs accountable, and promote equity. Income share agreements (ISAs)—contracts that allow learners to pay for education as a fixed percentage of their income over a defined period, with no payments required if they are not able to find a job—offer an exciting potential solution.
Unfortunately, a lack of clarity in the federal and state regulatory treatment of ISAs has prevented ISAs from scaling and realizing this transformative potential for learners. But this week, the Consumer Financial Protection Bureau (CFPB) clarified that ISAs are indeed subject to the Truth in Lending Act (TILA), a federal law enforced by CFPB that requires consumers receive standardized disclosures about a financial product’s terms and cost, including APR (Annual Percentage Rate). This follows on the heels of the announcement last month that the California Department of Financial Protection and Innovation had reached an agreement with ISA servicer Meratas that extends consumer protections that apply to student loan servicing to ISAs as well.
Regulation and innovation are not mutually exclusive.
These developments could be positive steps forward for learners and the ISA industry itself by bringing greater clarity to the regulatory treatment. If federal and state regulations are thoughtfully applied to ISAs, this emerging form of outcomes-based financing can finally enter the mainstream as a trusted form of education finance. More importantly, learners can benefit from the assurance that ISAs are held to the same level of protections as other forms of consumer credit.
But regulators must follow up by providing clear guidance on how ISA providers can comply with existing law and ensuring the guidance is thoughtfully designed to recognize that the structure of an ISA is very different from that of a traditional loan.
Failing to provide clear and thoughtful guidance could leave students inadequately protected or deprived of access to any ISA financing. For example, it is unclear how ISA providers should comply with TILA’s requirement to disclose APR because students at different income levels will have different APRs. Without clear guidance from regulators, providers may be held to unclear expectations and subject to unpredictable enforcement. And without thoughtful guidance—for example, if ISA providers are directed to disclose a single APR—then learners may end up confused about their options, or surprised when their repayments fall short of or exceed the single APR that was initially disclosed.
If federal and state regulations are thoughtfully applied to ISAs, this emerging form of outcomes-based financing can finally enter the mainstream as a trusted form of education finance.
ISAs hold great potential for expanding access, affordability, accountability, and equity to postsecondary education; to realize it, regulators must engage meaningfully with providers to establish regulations that place learners first. A robust dialogue between regulators and ISA providers can help ensure existing law is applied to ISAs in a way that is intentional and valuable for both learners and providers.
And regulators are not the only ones with more work to do. In addition to proactively engaging with regulators, ISA providers should carefully monitor their impact by studying their internal data, regularly solicit learner feedback on the design and disclosure forms of their ISAs, and work with researchers who wish to conduct research on the ISA model and how it impacts learners and equity.
The potential for clarity on how federal regulations govern ISAs is an opportunity to recognize that regulation need not come at the expense of innovation, and can potentially even promote innovation. But to achieve this, we must ensure that a clear and thoughtful framework is adopted that prioritizes consumer protections and enables new financing models to fulfill their goal of creating a more outcomes-based, equitable postsecondary education and training system.