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Income-Share Agreements Burden Women, Students of Color with Unfair Terms and Unforeseen Costs

Thursday, March 31, 2022
Whitney Barkley-Denney

WASHINGTON, D.C. — Borrowers using both federal student loans and Income-Share Agreements (ISAs) could pay as much as 25 percent of their discretionary income in repayment for a decade, according to a report published today by the Center for Responsible Lending (CRL). The report also found that ISA underwriting criteria could lead to negative impacts for women and people of color.

Marketed as innovative alternatives to student loans, ISAs are private loan products that allow lenders to require students to make payments in exchange for a percentage of their future earnings for a fixed number of years. Since ISAs use alternative criteria, such as a student’s major and projected future income, to determine the terms of their private student loan agreement, these loans could result in Equal Credit Opportunity Act (ECOA) violations.

“Because college majors are highly stratified by race and gender, using them as underwriting criteria could potentially result in higher loan rates for fields overrepresented by women and students of color,” said Whitney Barkley-Denney, senior policy counsel at CRL. “This approach is likely to confer advantages on students who have more generational wealth.”

The report notes that state and federal regulators are beginning to see ISAs as private student loans, but it suggests that clear and unequivocal guidance is needed to ensure ISA providers are subject to consumer protection laws. ISA companies continue to assert that federal consumer protection laws, such as the ECOA, the Truth in Lending Act (TILA) and state usury caps do not apply to their products.

“Exempting ISAs from consumer protection laws allows fintech companies to use their nonbank status to skirt federal and state lending laws, while providing what essentially are unregulated private student loans,” Barkley-Denney said. “States and the federal government should not allow further expansion of ISAs and should appropriately classify them as student loans to avoid deepening the $1.7 trillion student debt crisis. A more permanent solution would be across-the-board student debt cancellation.”

The report also found that:

  • The ISA marketplace lacks key controls over prepayment penalties, pricing comparisons and calculations, income verification and affordability due to a lack of regulation.
  • ISAs often supplement federal or private loans, which leads to “debt stacking.” This can result in a higher debt burden for low-income borrowers and unaffordable obligations during repayment.

CRL maintains that ISAs are not a solution to the student debt crisis, but simply are a new type of private student debt. CRL recommendations to address the nation’s ongoing student loan debt crisis include: canceling $50,000 in debt across the board; reforming income-driven repayment programs; making discharge options attainable and efficient and reducing interest rates on federal student loans.

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Press Contact: Vincenza Previte vincenza.previte@responsiblelending.org