The Department for Education clarified this week that revenue-sharing agreements in higher education are private loans. As loan providers, the companies providing these agreements are regulated in different ways than before the clarification, and colleges have specific requirements in terms of promoting the agreements.
Income Sharing Agreements (or ISAs) provide students with initial financial support and, in exchange, require them to repay a portion of their future earnings over a number of years. They are offered in some cases by colleges and in other cases by companies. Some ISA providers have argued that they are not loans.
The Department of Education acted after the Consumer Financial Protection Bureau in September issued a consent order against a student loan originator for misleading borrowers about ISAs, failing to provide required disclosures and violated the ban on prepayment penalties for private education loans. The CFPB concluded in its order that a student loan originator’s ISAs are private education loans. Additionally, in January, the CFPB updated its review procedures for private student loans to explicitly reference ISAs. The Department of Education action this week essentially applies this ruling to all ISA providers in higher education.
ISAs were initially primarily used by students in coding boot camps and other professional training programs who are not eligible for federal student aid. Interest rates in agreements have steadily increased over the past few years. Proponents say ISAs could be a solution to rising student debt burdens – because they are offered by private investors who want to see a return on their investment, ISAs are expected to not only be used for programs that will ultimately bring in future revenue. And because the contracts are based on student income, they won’t be burdened with payments they can’t make.
Others don’t view contracts as favorably. Critics argue that income-based federal loan repayment plans also allow borrowers to base their repayments on their income and that borrowers with higher salaries could end up paying more under ISAs than under ISAs. traditional student loans. Senator Elizabeth Warren, a Democrat from Massachusetts, along with other congressional Democrats, said the contract clauses could be “predatory and dangerous” and “include some of the most exploitative clauses in the private student loan industry,” such as binding arbitration agreements and class-bars of action.
Rich Williams, chief of staff for the Department of Education’s Office of Post-Secondary Education, wrote a blog post about the policy change on Wednesday.
“It’s no surprise that students often look to their college as a trusted source of information when determining how to pay for tuition, housing, books, and other living expenses,” he wrote. . “Capitalizing on this trust, some banks and lenders have long viewed colleges as a gateway to new consumers, courting schools to become their preferred provider of student loans and other financial products. In many cases, these companies offer financial incentives and incentives to colleges that market their financial products above others. Without safeguards, these financial incentives can create conflicts of interest that can incentivize students to use financial products – branded with trusted university logos – that have high or unusual fees and less consumer protection than other products widely available.
Williams continued: “Undertaking private student loans can be financially risky for students, but the department’s rules regarding agreements with preferred lenders can help reduce this risk by ensuring that students get unbiased and reliable information which they have. needed to make borrowing decisions. These rules ensure that colleges provide transparency on the terms and conditions of any college-approved private student loan and publicly document why they are approving a particular private student loan. Additionally, colleges must commit to a code of conduct that prohibits revenue-sharing agreements with a lender and eliminates other conflicts of interest. These are important practices for colleges to consider when approving any financial product.
Few who provide ISAs wanted to talk to Inside Higher Education. They fear more scrutiny from the Ministry of Education.
A person who works in the lending industry agreed to speak until his name and company were identified. He said not all ISAs are like loans. Some ISAs, he said, cap what students pay and offer very generous payment rates. There is nothing to be gained by over-regulating this sector, he said.
In the short term, he predicted that few people would enter the business at this time, with increased regulation.
But Ben Kaufman, director of research and investigations at the Student Borrower Protection Center, said: “The department’s announcement makes it clear that schools must follow the law when ordering students to take out risky private student loans, regardless of the new name of the creditors. snap on these products. This decision is a huge victory for students, and we hope it will be the start of a major campaign by the department and its partners, including the CFPB, to protect borrowers simply by forcing schools and lenders to their existing legal responsibilities.