Student advocates say that feature constitutes an upfront penalty, which is prohibited under federal rules governing student loans. In its March announcement, the Department of Education stated that ISAs are by definition private education loans. The department has yet to determine whether that means the ISA payment limit violates prepayment penalties regulations, Deputy Press Secretary Fabiola Rodriguez said by email. But “universities marketing private education loans are required to comply with all relevant legal and regulatory requirements” for such loans, she added.
The two states have tightened their rules. Last August, California announced it would treat ISAs as student loans under state law; in Illinois, a law passed the same month defined them as loans.
And at least one investor has been discouraged from using the ISA to fund training programs that provide students with short training in skills like coding. In 2019, Sean Linehan co-founded Placement Holdings. The company offered ISAs to help people move to higher income cities where they could earn more. Soon, it began offering career services to training program participants in close cooperation with ISA providers. But some students, especially those with no prior education, had trouble learning to code, Linehan told The Hechinger Report. Because the ISA allows students to apply to participate without paying upfront, they don’t have skins in the game, meaning even fewer students complete successfully, Linehan said. Today his company offers career coaching services, but he has left the ISA business.
Meanwhile, lawsuits piled up against training camps that offered ISAs. As of 2021, at least four people have been sued. In the latest case, in June, Washington State’s attorney general filed a lawsuit against a South Carolina company that offered an ISA that required students to pay up to $30,000 for an online course that lasted 6 to 12 weeks of software sales training. “You will be astounded by what we see in terms of program quality and the lack of diligence on the part of ISA providers,” said Kaufman, of the Student Borrower Protection Center.
Lenaya Flowers, 30, graduated from the Flatiron campus in Houston, a coding program, in May 2020. She found the school too expensive — $15,000 for a 15-week course — but it delivers. ISA sounds like a no-brainer. Proposal: She’ll pay nothing back until she gets a job that makes at least $45,000 a year. In doing so, she will give 10 percent of her monthly income to the school, up to a limit of $21,000 or 48 payments, whichever comes first, she said.
After graduating, she was looking for a full-time job for almost two years while doing freelance data science projects, and she started returning the ISA. In February 2022, she got a position as a data analyst at a company in Houston and now earns about $64,000. But she finds the $6,400 annual payment tough when combined with her other student loans—all in all, her ISA and loan payments will eat up about a third of the total. her income when the federal student loan deferral ends, she said. If given another chance, she wouldn’t be on the ISA or do this program.
Whitney Barkley-Denney of the Center for Responsible Lending said Her team sees ISAs as high-risk alternatives to student loans. Borrowers like Hoa sign up without understanding how the ISA will combine with their other student debt and are stuck with unmanageable monthly payments, she said.
Flatiron School did not respond to a request for comment. A notice on Flatiron’s website in May 2019 states that the school is no longer offering ISAs. At least one other company, the operator of a tech sales training program called Elevate, posted a notice on LinkedIn earlier this year that it also no longer offers ISAs.
The ISA industry responded to criticism by working with four US Senators to create a receipt that would create a new ISA regulatory structure. Introduced on July 19, it will give the consumer protection agency the official regulatory authority over the ISA, requiring borrowers to receive a standard set of disclosures and generate multiple more protections for low-income borrowers, among other provisions.
Even if it passes, it is impossible to know if it will be able to prevent the slide in ISA services.
“There’s a lot of optimism that this will be an alternative to student debt,” says Linehan, who thinks ISAs won’t account for more than 1% of future education financing. “I don’t think it’s going to make a material dent there.”
This story about income sharing agreement Made by The Hechinger . Report, an independent, nonprofit news organization focused on inequality and innovation in education. Our subscription higher education newsletter.
