On June 25, a group of twenty education organizations and individuals sent a letter to Congress urging it to regulate the use of income share agreements, or “ISAs” – an increasingly popular means of financing higher education. The letter was sent to the House Financial Services Committee and Senate Finance Committee, requesting legislation “that provides protections for student consumers and a legal framework to guide the work of institutions and providers.”

What are ISAs?

ISAs are tied to the amount of income student borrowers earn following graduation. Students who fail to meet minimum income standards are not required to make payments until the threshold is met. Likewise, if a student borrower leaves the workforce, then the repayment plan is “paused” until he or she returns to the workforce. The ISA programs are advertised as not accruing interest on the amount borrowed. However, repayment plans are based on a term of months or years, and a certain percentage of income is used to calculate the monthly payment. Repayment plans are commonly capped at 2.5 times the amount borrowed – which may far exceed the principal balance and interest that would be charged using traditional methods of student loan financing, depending on the circumstances of the student borrower.

Who uses ISAs?

ISAs have been created by a various colleges across the United States and are used to help reduce or eliminate student loans. Education providers who use ISAs include traditional four-year, research institutions and “last-mile training providers” preparing workers for the most in-demand jobs. The letter also identifies a diverse group of student borrowers who use ISAs, including working adults pursuing higher education, career changers, traditional students, and students who are otherwise disqualified from existing federal or state aid programs.

What would the ISA legal framework look like?

The letter suggests legislation that would “establish a definition of ISA, provide a proper disclosure framework for student consumers, set a national minimum income threshold, create adequate protections around stackability, provide clarity on tax treatment for both students and institutions funding ISAs, and identify a federal regulator” – among other provisions. The education groups suggest that strong, transparent protections will deter the risk of abuse. ISAs would not be considered a replacement for current federal loan and grant programs and would supplement existing income-based repayment options.