This week, Indiana’s Uniform Consumer Credit Code will be amended to exempt higher education institutions in the state from having to comply with key consumer protections. The change is so subtle that it hasn’t garnered much attention, but it has huge implications for Indiana students who sign “income sharing agreements” (ISAs). These contracts commit a student to pledge a portion of their future earnings in exchange for money to pay for their college education. Schools like Purdue University, and the private lenders and investors it partners with, will no longer be required to comply with many of the rules that apply to other Indiana lenders.
People outside of Indiana should also be careful. Former Indiana Republican Gov. Mitch Daniels, now Purdue chairman, was a enthusiastic support revenue sharing agreements, and pleaded with Congress for their widespread adoption. And advocates of revenue-sharing agreements, including Daniels, are pushing for similar rollbacks in consumer protections at the federal and state levels across the country.
They’re using a familiar playbook: Much like payday loans, auto title loans, and other “alternative debt products” unveiled before them, ISA lenders create debt securities, then convince policymakers to overturn rules that protect consumers from being exploited on the basis of immaterial or specious distinctions between their product and traditional loans. Lawmakers should consider mistakes made in other areas of predatory lending before rushing to replace existing consumer laws covering ISAs with industry-friendly rules.
Despite marketing claims that ISAs are “not a loan», misses a interest rateand align interests of the college and the student, ISAs work like traditional private loans. They are often funded by private investors, require repayment in all but the most severe circumstances, and carry draconian consequences in the event of default. Still, industry proponents argue that ISAs are distinct and new, requiring a new regulatory regime — importantly, one that doesn’t include key consumer protections that cover traditional lending.
We have heard this story before. The payday loan industry, for example, calls its product a “cash advance,” not a loan, promising help for people who need a short-term cash injection to meet their next paycheck. pay. Payday lenders Argue that the availability of short-term credit is a valuable public service and that its short-term nature requires different treatment from other loans. These industry arguments have, in broad terms, worked: for decades, policymakers in the majority of states aid The payday loan industry flourish by providing exceptions to state usury laws and other legal benefits. For consumers, the results have been dire, with average APRs just under 400% trapping borrowers in a cycle of debt. After decades of exploitation, lawmakers are still struggling to undo the damage and restore protection for borrowers.
The legislative agenda for ISAs echoes the deregulation of payday loans. Using a similar reasoning To “create a market” and “provide clarity” to investors, lawmakers are proposing plans that remove key protections for consumers while penalizing the use of abusive terms. For example, a federal bill, the Kids to College Act (HR 1810), who may soon have a mate in the Senate, exempts ISAs from state usury laws and state regulation of wage awards. It also assures lenders favorable treatment under various other federal laws, including the Bankruptcy Code.
Changes such as Indiana’s new law and the proposed Kids to College Act open the door for future ISA lenders to offer operating terms, and the actions of current lenders in revenue sharing give us reason to believe. that they will cross it. ISAs are already misleading students in their marketing. For example, they claim they earn no interest, but borrowers may very well repay far more than they borrow. This does count as interest.
Additionally, marketing materials claim that borrowers don’t need to make payments if they don’t meet a minimum income threshold, but that masks the very real possibility that they won’t be able to. meet their monthly obligations even if they do make the minimum income. The fact that trusted colleges are often the messengers touting the benefits of revenue sharing makes students even more vulnerable to having their rights waived without fully understanding what is at stake. And the financiers who profit from these arrangements are only only too happy to hide in the shadows while the sympathetic college administrators serve as pitchers for the ISA.
Students need the help of decision makers. The structure of the American higher education system puts a high price on college, forcing too many students into debt that they cannot repay. If lawmakers are serious about helping students, they must focus on the essentials: fighting for increased investment in public higher education, rebalancing power between employers and workers in the labor market, and easing the burden of debt. student. As for ISAs, it is time to apply the current law instead of inventing exceptions that protect the banks, not the borrowers.