The Consumer Financial Protection Bureau (CFPB) recently issued a crackdown on an industry providing a new financial product, income share agreements (ISAs), that can help students to better manage the cost of college. Many observers of the higher education space anticipated this would happen eventually. Despite the potential for ISAs to improve the educational, professional, and financial outcomes for students — especially those who are economically vulnerable — the Biden administration seems keen on halting the growth of this industry.
The emerging ISA industry is offering a safer alternative to private student loans, many of which have high interest rates and no post-graduation protections like federal student loans do. ISAs are contracts in which students receive funding to pay for their education in exchange for a portion of their post-grad salary. Purdue University was the first major research university to offer ISAs to their students as an alternative to pay for college without accruing debt. ISAs have since expanded to several other universities, like the University of Utah, and private colleges.
ISAs function in a safer way for students by setting the loan repayment amount to a percentage of a borrower’s income. When a borrower’s income decreases due to an economic downturn or a lapse in unemployment, the borrower isn’t left with unaffordable payments. On the other hand, students who end up beating the odds in a high paying career path will pay a bit more for the privilege. The system effectively has those who win big from college subsidizing those who don’t.
To be clear, ISAs are not a panacea to the problems that plague our system of financing higher education. But they do have a lot to offer. First, they protect students from unaffordable payments after graduation. Private student loans offer no such protections and remain non-dischargeable in bankruptcy. Additionally, the structure of the contracts puts pressure on institutions to help their students succeed; if a student fails to thrive economically after graduation, the school won’t get paid.
Despite these potential advantages of ISAs, there is always the potential for bad actors to abuse students who often have limited financial literacy. That’s why the existing providers have long been advocating for regulation to set guardrails for the industry.
But instead of working with Congress on legislation to prevent bad behavior in the industry, the administration seems to prefer taking shots at providers through CFPB action. Their first target was Better Future Forward (BFF), which is one of the only non-profit providers of ISAs. In a press release explaining its actions, the CFPB sent a “clear message to the ISA industry” by directly attacking the exact kind of necessary innovation that BFF was helping to establish.
Regardless of the potential of ISAs, BFF is a strange target for the CFPB to hit first. Going after a small non-profit with the goal of using funding “to drive positive, equity-based changes” in higher education financing is seen by many as unjust and unnecessary, especially when 81 percent of BFF’s students are first generation college students.
Experts anticipated that the Biden administration would be out to get the ISA industry, but the way the CFPB has attacked it seems to reflect a poor understanding of the student loan marketplace. The truth is that ISAs have the potential to make it safer for students to self-finance their education. If the Biden administration really wants to protect consumers within the ISA industry, then executive officials should work with policymakers to clarify this gray legal space rather than trying to undermine efforts from well-intentioned providers.