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The Consumer Financial Protection Bureau took action Tuesday against a company offering income-share agreements to help students finance their degrees. The company misrepresented its product and failed to comply with federal consumer financial law, according to the federal agency.
Better Future Forward Inc., a nonprofit led by former congressional staffer and American Enterprise Institute researcher Kevin James, falsely represented that income-share agreements, or ISAs, aren’t loan products and don’t create debt, failed to provide disclosures for private education loans as required by federal law, and imposed unlawful prepayment penalties on its private education loans, according to the CFPB.
ISAs offer students up-front financial support and, in exchange, require them to pay back a portion of their future income for a set number of years. Unlike other companies that offer ISA programs through colleges and universities, Better Future Forward offers its contracts directly to students.
“The ISA industry has tried to evade oversight by claiming that its products are not loans,” Dave Uejio, acting director of the CFPB, said in a press release. “But regardless of the name on the label, these products are credit and have to comply with federal consumer protections. The ISA industry cannot pretend that core consumer protection laws do not apply to their products.”
Under a consent order filed by the CFPB, Better Future Forward will stop stating that its ISAs are not loans or don’t create debt for consumers and must provide borrowers with loan disclosures, including finance charges, the amount financed, the annual percentage interest rate and other disclosures required for private education loans. Better Future Forward also must continue its practice of not objecting to a student’s discharge of their ISA in bankruptcy proceedings and reform its lending contracts so that it doesn’t impose a prepayment penalty on a private education loan.
The CFPB didn’t impose any financial penalties against Better Future Forward because it “demonstrated good faith and substantial cooperation” throughout the process, according to the CFPB.
“Given the promise of ISAs and their uncertain treatment within existing regulatory regimes, BFF has been a leader in advocating for policymakers to adopt clear and protective guardrails for the emerging ISA space,” James said in a statement. “In this vein, we appreciate the Bureau’s recognition of our demonstrated good faith and cooperation throughout this process, as reflected in the Consent Order. While there has been uncertainty about the application of the existing federal loan disclosure regime to risk-sharing tools like ISAs, we believe CFPB’s oversight role is critical and are eager to work with the Bureau to bring clarity to these questions around how federal disclosures should apply to BFF’s ISAs.”
ISAs were initially mainly used by students at coding boot camps and other skills training programs that aren’t eligible for federal student aid. Interest rates in the agreements have steadily increased in recent years. Supporters say ISAs could be a solution to rising student debt burdens -- because they’re offered by private investors who want to see a return on their investment, it’s expected that ISAs will only be used for programs that will pay off. And because the contracts are based on students’ income, they won’t be burdened with payments they can’t make.
Others don’t view the contracts as favorably. Critics argue that income-driven repayment plans for federal loans also allow borrowers to base their loan payments on their income and that borrowers with higher salaries could end up paying more under ISAs than through traditional student loans. Senator Elizabeth Warren, a Democrat from Massachusetts, along with other congressional Democrats, has said contract terms could be "predatory and dangerous" and "include some of the most exploitative terms in the private student loan industry," such as mandatory arbitration agreements and class action bans.
An Education Department spokesperson said the department plans to consult with the CFPB to better advise institutions that support ISAs, since under preferred lender rules, colleges that endorse private loan products are required to advocate for their students' best interests.
"The Department is committed to making higher education more accessible and affordable and supporting good practices that protect loan borrowers so students don’t graduate under mountains of debt," the spokesperson said.
The Student Borrower Protection Center -- which previously filed a complaint with the Federal Trade Commission against Vemo Education Inc., another ISA provider -- praised the CFPB’s actions against Better Future Forward.
"Despite industry attempts to evade consumer protections, federal law is clear -- income share agreements have always been a form of consumer credit and all borrowers are entitled to the same rights and protections, regardless of whether they took out an ISA engineered by Silicon Valley or a traditional loan from a big bank," the organization said in a statement. "Nearly every aspect of the ISA model harms consumers and is illegal: from the discriminatory impact on women and borrowers of color, to the predatory interest rates, the tricks and traps designed to lure vulnerable borrowers into high-cost debt. Now is the time for law enforcement officials at all levels of government to act swiftly to hold this rogue industry accountable and provide justice to borrowers."
