In the ever-evolving landscape of higher education, students are turning to alternative options to finance their enrollments as expenses have increased tremendously. One such option that has gained prominence is the Income Share Agreement or ISA. These agreements offer students a way to finance their education by pledging a percentage of their future income in exchange for upfront funding. While ISAs may seem like an appealing alternative to traditional student loans, they come with their own set of risks and challenges.
In this article, we’ll explore the concept of ISAs, their potential pitfalls, and why the Consumer Financial Protection Bureau (CFPB) has taken action to regulate them.
Understanding Income Share Agreements (ISAs)
An Income Share Agreement is a financial arrangement between a student and an investor, often facilitated by a university or a third-party entity. Under an ISA, the student receives funds to cover their education expenses. In return, they agree to pay a fixed percentage of their future income for a specified period after graduation.
ISAs are marketed as a flexible and lower-risk alternative to traditional student loans. Unlike loans, payments are tied to the student’s income, and the cost of borrowing is not expressed as “interest,” hypothetically making them more manageable, especially during periods of lower income.
The Risks and Pitfalls of Income Share Agreements
While ISAs may offer some advantages, there are several key risks and pitfalls that students should be aware of:
- Lack of Regulation
ISAs have been subject to minimal federal oversight, so terms vary significantly between agreements; this lack of standardization can make it challenging for students to understand the terms they are agreeing to.
- Uncertainty of Payment Terms
ISA agreements typically outline a fixed percentage of income that the student must repay, but the duration and the income threshold at which payments begin can vary. Some agreements may require payments for a set number of years, while others may impose payment obligations until a certain income level is reached.
- Potential for High Costs
The overall cost of an ISA can be higher than that of traditional loans, particularly if the student experiences significant income growth after graduation. Students may pay significantly more than the initial funding received.
- Limited Flexibility
While ISAs offer flexibility in income-based repayment, they can also limit career choices. Students may hesitate to pursue lower-paying or nonprofit careers because it could extend the repayment period, potentially affecting their long-term financial well-being.
The CFPB Action on ISAs
Given the concerns surrounding ISAs, the Consumer Financial Protection Bureau has taken steps to address potential opportunities for students to be misled. The CFPB has raised red flags about the lack of transparency in ISA terms and the potential for predatory practices. Some specific areas of concern include:
- Misleading Marketing
The CFPB has expressed concern about deceptive marketing practices related to ISAs. Some companies may use misleading language to make ISAs appear more favorable than they are, leading students to believe they are making a wise financial choice when, in reality, they may be entering into a risky agreement they don’t understand.
- Lack of Consumer Protection
The CFPB has highlighted the need for stronger consumer protections for students entering ISAs; this includes clear disclosure of terms, risks, and potential costs associated with these agreements.
- Risk of Predatory Behavior
The CFPB has noted the risk of predatory behavior by companies offering ISAs. Some companies may aggressively market ISAs to students without adequately explaining the potential downsides or conducting proper underwriting to assess a student’s loan repayment ability.
What Students Should Be Aware Of
For students considering an ISA to fund their education, it’s essential to be fully informed and exercise caution.
Here are some key considerations:
Carefully review all terms and conditions before signing an ISA. Ensure you understand the repayment terms, including the percentage of income you’ll be required to pay and the duration of payments. Compare ISAs with traditional student loans, including federal and private options. Consider traditional loans’ interest rates, repayment terms, and protections before committing to an ISA. Research the company or institution offering the ISA. Look for reviews, complaints, and regulatory actions or investigations related to their ISA programs.
Consulting a student loan attorney or consumer protection lawyer can provide valuable insights and help you navigate the complexities of ISAs. They can review the agreement, offer advice, and ensure you fully understand the potential risks.
If you have been victimized by an unscrupulous/unlawful income share agreement, the experienced student loan attorneys at The Holland Law Firm can help; contact us today.