There is an increasing bipartisan interest in a newer education finance tool called the Income Share Agreement (ISA). An ISA, like a student loan, helps open the door to education but from there it takes a path less traveled because repayment is tied to education completion and future employment.
On March 18th, Mark Green (R-TN) (cosponsor Vincent Gonzalez (D-TX)) introduced H.R.1810 (116) the “Kids to College Act.” The bill’s purpose is “to provide the legal framework and income tax treatment necessary for the growth of innovative private financing options, and for other purposes.” The labyrinth of student loan laws and regulations spell out the rules of the game for students and lenders. The legal structure for student finance tools beyond student loans is minimal. The Income Share Agreement (ISAs) is a new financial vehicle for students to fund their education. It’s in use by many institutions all across the country.
In working with an ISA, the student enters into a financial agreement with the educational institution or third-party financial institution without providing any cash payment upfront. When the student graduates and gets employed at a benchmarked yearly wage, they begin to pay a pre-determined percentage of their income for a specified time or until a specific amount is reached. Also, repayment flexibility is built in with the fixed income threshold that acts as a start/pause mechanism and activates when the income is below, reaches, and exceeds the established benchmark. The ISA puts a responsibility on the institutions, educational and/or financial, to see to it that the student completes a degree and obtains gainful employment.
On June 25, 2019, Jack Markell (D, Former Governor, DE) and John Baily (R, Bush W, Advisor) sent a bipartisan letter endorsed by them and 18 schools, universities, colleges, academies, education companies, foundations, institutes, and the U.S. Chamber of Commerce to the leadership of the Senate Committee on Finance and the House Committee on Financial Services. In the letter, they explained Income Share Agreements and urged “Congress to pass sensible legislation that provides protections for student consumers and a legal framework to guide the work of institutions and providers.” The letter stressed that the ISA does not replace student loans but rather it is to “be considered in the context of existing income-based repayment options.” The responsibility shift of the ISA moves the economic risk of higher education to the educational institution and/or third-party financial institution, away from student. Educational institution’s highest responsibility is to ensure the student completes a quality education and enters workforce with desires skills and the ISA can be another tool to help institutions focus on this top priority.
Critics, like Elizabeth Warren, see the ISA as just another type of student loan that might use deceptive marketing tactics by bad actors, leading to more bad student debt. At the same time, supporters claim that the ISA has more market discipline with student financing because private backers have a vested interest in successful outcomes. Either way, the ISA is here to stay, and its bipartisan support is growing. A thorough set of laws and rules enacted by Congress might help the ISA avoid the blunders and bad actors of student loan lending’s past. Now the question is how can the Income Share Agreement best be regulated and help students on their successful trajectory?