By: Kate Fisher and Caleb Rosenberg, Hudson Cook LLP
Currently, no federal or state statutes address Income Share Agreements (“ISAs”) between private educational institutions, such as coding schools, and students. This lack of legislative action has resulted in uncertainty regarding the transactions. Given the massive student loan market and potential first mover advantages, some schools and investors are forging ahead.
Separate bipartisan bills addressing ISAs have been introduced in the House—the Kids to College Act—and the Senate—the ISA Student Protection Act. The bills are not identical, but the passage of either would clarify the legal framework for ISAs.
But what is an ISA? ISAs provide an alternative to student loans. In an ISA transaction, the school or ISA provider pays the student’s tuition today in exchange for a percentage of the student’s future income above a certain threshold over a specified number of years. Payments are contingent on the student earning income above that threshold. If a student earns above that income threshold, the payment amount varies based on income. The student and the ISA provider share the risk that the student’s education does not lead to increased income.
The contingency and variation of payments also creates uncertainty about whether state and federal laws governing credit transactions apply. Both the Kids to College Act and the ISA Student Protection Act would preempt state laws related to lender licensing and usury. Additionally, both proposals provide clarity that ISAs made under those acts would not violate certain federal credit laws, including the Truth-in-Lending Act.
We expect to see increased interest in these innovative options to traditional student loans. When evaluating an ISA program, providers must carefully consider the potential application of various state and federal laws governing credit transactions to appropriately assess the legal risks.
Kate Fisher is a partner in Hudson Cook’s Maryland office and can be reached at kfisher@hudco.com. Caleb Rosenberg is an associate in the Maryland office and can be reached at crosenberg@hudco.com.
This article is provided for informational purposes and is not intended nor should it be taken as legal advice. © 2020 Hudson Cook, LLP. All rights reserved.
