Battle Lines Drawn on a Student Loan Alternative

Senator Elizabeth Warren and other congressional Democrats delivered a warning on Tuesday about the potential dangers of income-share agreements, an alternative form of college financing increasingly popular with some critics of student loans. The lawmakers' primary target was the Trump administration -- which has expressed interest in experimenting with the agreements -- but the shot across the bow also aimed at colleges operating their own ISA plans.

Income-share agreements offer students financial support up front and in exchange require them to repay a portion of their income for a set number of years. They first caught on at coding boot camps and similar programs that don’t receive federal student aid. But a handful of four-year colleges have begun offering their own ISA plans and, last month, the Trump administration said it planned to pursue a federal experiment to offer income-share agreements to students.

Warren, a Massachusetts Democrat, as well as Democratic representatives Ayanna Pressley of Massachusetts and Katie Porter of California, told Education Secretary Betsy DeVos in a letter released Tuesday that it’s “deeply disturbing to see a department official boosting novel forms of student debt instead of trying to stem the tide of indebtedness.” It's not clear yet what kind of demand there is for a federal ISA program; many boosters say it's unnecessary. But the Democrats asked DeVos for details about the experiment and in separate letters sought information on student protections from seven four-year colleges offering ISA programs.

Although the letter was prompted by the talk of potential federal involvement, the Democrats expressed skepticism of income-share plans more broadly, arguing that they share the same potential pitfalls as private student loans, “with the added danger of deceptive rhetoric and marketing that obscure their true nature.”

The amount of college financing that flows to students through ISAs is still just a drop in the bucket compared to the federal student loan program. But proponents -- and a flurry of news coverage -- have touted the contracts as a solution to rising student debt burdens.

Supporters argue that because they are primarily offered by private investors, they introduce more market discipline into higher ed financing. Because funders want to see a return on investment, the thinking goes, they will only back ISAs for programs that will pay off.

ISA backers also say they provide more certainty about the repayment timeline and, because they are based on graduates’ income, don’t burden them with payments they can’t make. And, unlike student loans, income-share agreements don’t accumulate interest.

Skeptics, though, often note that federal student loan borrowers can enroll in income-driven repayment options, so their loan payments, too, are based on what they can pay. They also argue that graduates with high salaries could end up paying more under ISA plans than they would with traditional student loans.

Joanna Darcus, a lawyer at the National Consumer Law Center, said the group shared the congressional Democrats' concerns about consumer protection issues like forced arbitration. Purdue's Back-a-Boiler program, for example, includes a mandatory arbitration provision barring students from joining class action lawsuits, although they can choose to opt out by mailing a signed notice to the ISA fund. ISA funds have also sought to bar students from filing for bankruptcy, Darcus said. NCLC has advocated for making student loans eligible for bankruptcy.

“Today’s students can’t afford for ISAs to proliferate without some checks,” she said. “It's essential that ISAs comply with consumer protection laws and regulations.”

Beth Akers, a senior fellow at the Manhattan Institute, supports ISAs as an alternative financing option for college degrees, although she doesn't necessarily think the Education Department should get involved in backing them. Extra scrutiny of ISAs by Congress could actually be a good thing, she said.

“ISAs are suffering right now from a lack of oversight,” Akers said. “Putting guardrails on this emerging market will help with fund-raising efforts and obviously ensure that students don’t fall victim to unfair contracts.”

Members of Congress have introduced legislation -- so far unsuccessfully -- to encourage more ISAs by clarifying federal standards for income-share agreements. The discussions about a federal experiment by the Trump administration show that ISAs continue to draw interest from policy makers.

Diane Auer Jones, principal deputy under secretary at the Education Department, made a surprise announcement at the Reagan Institute Summit on Education last month that the Trump administration is looking into how it could offer a federal experiment with ISAs. Jones didn’t offer further details about a potential experiment, and the department hasn't released additional information.

Liz Hill, an Education Department spokeswoman, said Tuesday that any experiment would "seek to explore the risks and benefits of ISAs."

The fact that those discussions are happening at all, though, reflects broader priorities of the Trump administration to promote alternatives to traditional college degrees and student debt.

Although Jones's announcement could be seen as a sign of encouragement to traditional higher ed programs interested in offering ISAs, many supporters of the approach were skeptical that financing from the federal government would be a helpful development.

The market has grown slowly among traditional higher ed programs: only seven colleges with access to federal student aid programs have offered such programs so far, most notably Purdue. Others include Clarkson University, the University of Utah, Messiah College, Lackawanna College, Colorado Mountain College and the University of California, San Diego. Each received a letter from Warren and the other Democrats this week.

Representatives from more than 25 other colleges attended a conference focused on ISAs on the Purdue campus last month.

The letters from Warren, Pressley and Porter effectively put those institutions on notice that Congress is monitoring risks to graduates. Akers said that Democrats will likely find that the terms offered by the colleges are favorable to students.

“Critics of ISAs are often concerned that ISAs are crowding out federal student loans, which have generous terms and robust safety nets,” she said. “But what they’ll see if colleges turn over their data is that colleges are using ISAs only to replace financial products that are much less friendly to students, like private student loans and Parent PLUS loans.”

Tim Doty, a spokesman for Purdue, said the congressional Democrats are right to be concerned with rising student debt. But he said it’s “sad and incomprehensible to see those in positions of authority seeking to stifle any new idea designed to alleviate this problem -- one that’s been exacerbated by the abject failure of the federal loan program for which they are responsible.”

The University of Utah launched its income-share program earlier this spring primarily to assist debt-averse students who start and stop because of financial challenges, adding to the time it takes them to graduate, said Chris Nelson, a spokesman for the university.

The program is designed for seniors in a limited number of majors within 32 credit hours of finishing their degree. Payments are capped at 2.85 percent of income and returned to the fund that backs the program, Nelson said.

"We hope that innovative and transparent models, designed by universities with the needs of their students at the forefront, can be implemented and evaluated in terms of impacts on college completion," he said. "Far too many students start college and leave without a degree. This national challenge requires new approaches."