Will Income Sharing Agreements Be The Next Payday Loans?
This week, Indiana’s Uniform Consumer Credit Code will be amended to exempt state institutions of higher education 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 up to “revenue sharing agreements” (ISAs). These contracts commit a student to pledge a portion of their future income in exchange for money to pay for their studies. Schools like Purdue University, and the private lenders and investors it partners with, will no longer be required to comply with most of the rules that apply to other Indiana lenders.
People outside of Indiana should also be careful. Former Republican Indiana Governor Mitch Daniels, now president of Purdue, has been a strong supporter of the revenue-sharing agreements and has advocated with Congress for their widespread adoption. And advocates of revenue sharing agreements, including Daniels, are pushing for similar cuts in consumer protections at the federal and state levels across the country.
They use a familiar playbook: Just like payday loans, auto title loans, and other “alternative debt products” unveiled before them, ISA lenders create debt instruments and then convince policymakers to cancel the rules that protect consumers from exploitation, on the basis of intangible 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 the marketing claiming that ISAs are “not a loan,” have no interest rate, and align the interests of college and student, ISAs operate like traditional private loans. They are often financed by private investors, require repayment in all but the most serious circumstances, and have drastic consequences in the event of default. Still, industry supporters argue that ISAs are separate and new, requiring a new regulatory regime, which does not include key consumer protections that cover traditional loans.
We’ve 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 reach their next check. payroll. Payday lenders argue that the availability of short-term credit is a valuable public service and 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 have helped the payday lending industry thrive by providing exceptions to state usury laws and other legal advantages. For consumers, the results have been dire, with average APRs of just under 400% trapping borrowers in a cycle of debt. After decades of exploitation, lawmakers are still struggling to repair the damage and restore protections for borrowers.
The legislative agenda of ISAs echoes the deregulation of payday loans. Using a similar logic of “creating a market” and “providing clarity” to investors, lawmakers are proposing plans that remove key consumer protections while penalizing the use of abusive terms. For example, the federal bill, the Kids to College Act (HR 1810), which may soon have a companion in the Senate, exempts ISAs from state usury laws and state regulations on usury. allocation of wages. It also provides lenders with favorable treatment under a variety of other federal laws, including the Bankruptcy Code.
Changes such as Indiana’s new law and the Kids to College Act proposal open the door for future ISA lenders to offer operating terms, and the actions of current revenue-sharing lenders give us reason to believe they will get through. ISAs are already misleading students in their marketing. For example, they claim that they bear no interest, but borrowers may very well repay a lot more than they borrow. It 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 this masks the very real possibility that they won’t be able to meet. their monthly obligations even if they to 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 waiving their rights without fully understanding what is at stake. And the financiers who profit from these arrangements are just that. too happy to hide in the shadows while friendly college administrators serve as ISA pitchmen.
Students need help from decision makers. The structure of America’s higher education system puts a high price on college, forcing too many students into debt they cannot pay off. If lawmakers are serious about helping students, they should 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 student debt. . As for ISAs, it’s time to apply the current law instead of inventing waivers that protect banks, not borrowers.