This week, Sens. Todd Young (R-Ind.), Mark Warner (D-Va.), Chris Coons (D-Del.), Marco Rubio (R-Fla.) introduced legislation that would explicitly apply existing federal consumer credit protections to income share agreements (ISAs) while also creating important protections unique to the financing tool. The new legislation comes just four months after the U.S. Department of Education weighed in on ISAs, clarifying that it considered the agreements to be private loans.
Few higher education issues in recent years have been more contentious than ISAs. To proponents, they represent a potential remedy to the nation’s student debt crisis, providing a less risky way for learners to pay for their education and an opportunity to hold schools accountable if the education they provide does not lead to student success in the labor market. To critics, they are no better than predatory and potentially discriminatory loans, drawing comparisons to indentured servitude. But recent developments like the newly introduced legislation — and the availability of new research on the impact of ISAs — reveal a path forward to ISAs as a viable financing option with strong and consistent protections for borrowers.
While critics and proponents of ISAs may disagree strongly on potential solutions, there is widespread agreement that our system of higher education — and how students pay for it — badly needs reform. While college often provides significant benefits to students who graduate, one-third of college graduates — and four out of ten recent graduates — are underemployed, working in jobs that do not typically require a college degree. Many students don’t even graduate at all, with just 60 percent of students graduating within six years. A recent analysis found that across 30,000 bachelor’s degree programs, 16 percent of programs provide students no financial payoff and may leave them worse off. The status quo of postsecondary education is failing to provide access to high value degrees and credentials for too many students.
Students also face enormous debt burdens. Over one-fifth of households have some student debt, and those in the bottom half of the income distribution have seen their average debt-to-income ratio more than double in the last 20 years. Coupled with a persistent racial wage gap, Black and Latinx students are likely paying a far larger share of their earnings in loan payments, even as their lower graduation rate means they’re less likely to reap the full benefits of the education. Meanwhile, an understandable aversion to loans has led many Americans to forego college altogether.
These problems stem from the fact that students — rather than schools or lenders — are forced to bear the entire risk of financing their education, because if the program’s career outcomes don’t translate into a sustainable wage and career path after graduation, the student is still on the hook to repay the loan in its entirety.
ISAs can flip that risk proposition: under a well-designed ISA, students only pay for education if they subsequently find a well-paying job. If they don’t, schools and lenders must cover the cost. Shifting the risk to schools and lenders also gives them a strong incentive to ensure the education is high quality and aligned with labor market demand, as well as to provide additional services to assist students in graduating and finding jobs. Schools should compete on the basis of their student outcomes, not the size of their marketing budget.
While ISAs could help to improve the affordability, accountability, and access of the postsecondary system on the whole, they may prove to be especially impactful for programs that do not access federal dollars through Title IV of the Higher Education Act. With interest in short-term and other non-degree programs booming, the need for new and innovative financial models is greater than ever.
But for years, experts and consumer protection advocates have voiced concerns that for some students, ISAs may ultimately be more expensive than traditional loans, and could leave students even more indebted if stacked on top of existing student loans. Perhaps even more concerning, they have argued that ISAs are inherently discriminatory, creating a disadvantage for women and students of color.
Moreover, while providers have historically taken the position that ISAs are not subject to a wide array of existing consumer credit laws at the federal and state level, critics see this position as evidence that ISA providers are prioritizing innovation over regulatory compliance. While the recent statements from the U.S. Department of Education and the Consumer Financial Protection Bureau have begun to clarify the regulatory treatment, many questions remain unanswered, leaving students, schools, philanthropies, finance providers, and private investors unsure of how existing laws apply to ISAs.
Fortunately, there is an opportunity for the two sides of the debate to find common ground and work together on a unified path forward. First, we need clear and thoughtful consumer protections at both the federal and state level that take into account the unique nature of ISAs and hold them accountable for the promises they make to students. The recent federal legislation provides a good example of this approach, and states have an opportunity to clarify and strengthen their approaches to regulating ISAs.
And second, we need rigorous research to better understand how ISAs affect students and equity. After all, many of the claims of both proponents and critics of ISAs are largely based on theory and anecdote, and research can help us better understand both the upsides and risks of ISAs. For example, a recent analysis of more than 7,500 ISA outcomes—using data provided voluntarily from one of the largest ISA servicers — strongly suggests that contrary to the speculation from the critics, ISAs are in fact not inherently discriminatory. The study found that ISAs do not cost more to Black, Latinx, and female students — like any tool, the impact of an ISA is not an intrinsic property but instead depends on how it is designed and used. ISA providers should explore more opportunities to offer their data for analysis by academics and independent research organizations.
ISAs hold great potential for expanding access, affordability, accountability, and equity in postsecondary education. Proponents of ISAs want to see continued expansion and innovation of ISAs so that they can realize their lofty promise. Critics of ISAs worry that students are unprotected and vulnerable. Clear and thoughtful consumer protections and rigorous research offer a path to resolve this seemingly intractable controversy, giving this promising new way to pay for education and training a chance to prove its worth.
Ethan Pollack leads Jobs for the Future (JFF) Financing the Future initiative.