Align Income Share Funding is giving consumers cash in exchange for monthly payments, but don’t call it a loan. Instead, Align offers Income Sharing Agreements (“ISAs”) whereby consumers borrow money and then pay back a fixed percentage of their income for up to five years. It’s a new financial product that’s growing in popularity, and regulators are grappling with what to do about them.
The History of ISAs
The idea for ISAs is commonly credited to a 1955 essay by Milton Friedman in which he suggested that “investors” could purchase “shares” in a student’s earning potential by advancing funds in exchange for a specified portion of the student’s future earnings. In the 1970s, Yale University tried a version of the ISA where an entire graduating class agreed to pay off their collective debt as a percentage of their income over 35 years. The plan failed, and in 2001 Yale forgave the remaining debt.
In light of the nation’s $1.5 trillion in student loan debt, ISAs are making a comeback. For years, many tech bootcamps have offered students ISAs, but in 2016 Purdue University became the first major university since Yale’s experiment to offer ISAs. Other universities have started to follow suit, including the University of Utah, which announced an ISA program in January 2019. Thousands of students have used ISAs to fund their education, and the product has made its way to the general consumer market.
Align, founded as Cumulus Funding in 2011, is the United States’ only provider of ISAs for general use. For years, Align has offered ISAs in California, Delaware, Illinois, Montana, and Wisconsin. It recently expanded into Florida and Arizona, with the blessing of Attorney General Mark Brnovich.
Regulators Debate the Future of ISAs
In Arizona, Align operates under the state’s fintech “regulatory sandbox.” The law empowers Attorney General Brnovich to exempt novel financial offerings like ISAs from Arizona’s consumer lending laws, including the state’s usury law. ISAs also are not subject to the Truth in Lending Act, which requires borrowers be given a sheet showing them the effective interest rate of a loan.
A borrower cannot know in advance what the “interest rate” of an ISA might be due to the nature of the instrument. If the borrower’s earnings are low, they might pay less than the amount borrowed. If their income is high, they could pay much more—although Align’s ISAs include a provision that allows the borrower to terminate the ISA with a buy-out, in case they have a sudden windfall.
As Brnovich noted, there is a strong case to be made that ISAs are “not a consumer loan under state law.” And if ISAs are not consumer loans, Align would not “need a license, and there wouldn’t be any government oversight,” he said. Under Arizona’s regulatory sandbox, the state can “see how this works in a controlled environment, how the company interacts with consumers, and ultimately whether their product proves out.”
At the federal level, Sen. Marco Rubio (R-Fla.) and Sen. Todd Young (R-Ind.) introduced legislation in 2017 with the aim of providing a legal structure for ISAs, although the proposal went nowhere. More recently, a top Department of Education official said that the agency is looking at ways to provide support for ISAs. She warned, however, that ISAs must be designed carefully and may not work for every institution.
As ISAs continue to grow in popularity and start to reach the general consumer market, state and federal laws will likely be developed and adapted to regulate the product. Troutman Sanders will continue to monitor and report on developments in this area.