“Income-share agreements,” or ISAs, fund a portion of educational costs in exchange for a percentage of a student’s earnings over time. Many ISA providers continue to argue that their products are not loans even though they lend money and subsequently require repayment, employing an old and predatory tactic that loan providers use to evade consumer protection guardrails. In fact, ISAs are simply high-cost loans that currently lack even the protections afforded to private student loans, which themselves are a worse option than federal student loans for most borrowers.

The high cost of ISAs often results in unmanageable repayment burdens, and discriminatory impacts on women and people of color. States can and should reject attempts by ISA providers to market their product as an “innovation,” and policymakers must regulate ISAs as loans and provide the same protections to borrowers as those who use federal and private loans to finance their education.

Despite industry marketing of ISAs as “innovative” products, ISAs are dangerous private loans that allow private investors to put a super lien on a borrower’s future income without guardrails against unfair practices. Even worse, ISAs do nothing to address the root causes of the student loan crisis – the unaffordable cost of a college education and the failure of a myriad of repayment options to adequately address those costs.

Throughout the pandemic, ISA programs have been created and advertised around the nation, leading some advocates to warn that companies promoting ISAs see the COVID-19 crisis as “an opportunity to capitalize on borrowers’ vulnerability and make a quick buck.” These products are, unfortunately, a new attempt by lenders to profit from the student debt crisis and the associated problems with the high cost of higher education. Addressing the student debt crisis requires across-the-board debt forgiveness and better federal repayment and discharge options, not new types of debt.

While ISAs are relatively new products, emerging trends are concerning. This memo provides a regulatory overview and highlights four potential risks presented by income-share agreements to borrowers:

  • the high-cost relative to other student loan options;
  • the risk of unmanageable repayment situations for borrowers who “stack” ISAs on top of federal student loans;
  • the risk of lending discrimination; and
  • a lack of critical consumer protections.

Download the memo to continue reading.