Student advocates say that feature constitutes a prepayment penalty, which is forbidden under federal rules governing student loans. In its March announcement, the Department of Education declared that ISAs are by definition private education loans. The department has not yet determined whether that means that ISA payment caps violate the prepayment penalty rules, deputy press secretary Fabiola Rodriguez said by email. But “colleges that market private education loans are required to comply with all related legal and regulatory requirements” for those loans, she added.
Two states have already 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 defines them as loans.
And at least one investor has soured on using ISAs to fund boot camps that offer students short-term training on skills like coding. In 2019, Sean Linehan cofounded Placement Holdings. The company provided ISAs to help people move into higher-paying cities where they could earn more. Soon, it began offering career services to boot camp participants working closely with ISA providers. But some students, especially those without much prior education, had a tough time learning to code, Linehan told the Hechinger Report. Because ISAs let students enroll in them without paying up front, they had no skin in the game, meaning even fewer students successfully finished, Linehan said. Today his company offers career coaching, but he’s gotten out of the ISA business.
Meanwhile, lawsuits are piling up against boot camps offering ISAs. Since 2021 at least four 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 obligated students to pay up to $30,000 for a 6- to 12-week online course providing software sales training. “You’d be blown away by what we see with program quality and the lack of diligence by ISA providers,” says Kaufman, of the Student Borrower Protection Center.
Lenaya Flowers, 30, graduated from the Houston campus of the Flatiron School, a coding boot camp, in May 2020. She found the school overpriced—$15,000 for a 15-week course—but it offered an ISA that sounded like a no-lose proposition: She’d pay back nothing till she got a job earning at least $45,000 a year. When she did, she’d give 10 percent of her monthly income to the school, up to a cap of $21,000 or 48 payments, whichever came first, she said.
After graduating, she looked for a full-time job for almost two years while taking on freelance data science projects, and she started paying back the ISA. In February 2022 she landed a position as a data analyst at a Houston company and now makes about $64,000. But she’s finding the $6,400 in annual payments tough in combination with her other student loans—in all, her ISA and loan payments will gobble about a third of her gross income once federal student loan deferment ends, she says. Given another chance, she wouldn’t take the ISA or do the program.
Whitney Barkley-Denney of the Center for Responsible Lending says her group sees ISAs as high-risk alternatives to student loans. Borrowers like Flowers sign on without understanding how the ISAs will mesh with their other student debt and get themselves stuck with unmanageable monthly payments, she said.
The Flatiron School didn’t respond to requests for comment. A notice on Flatiron’s site dated May 2019 says the school no longer offers ISAs. At least one other company, a tech sales boot camp operator named Elevate, posted a LinkedIn announcement earlier this year that it’s no longer offering ISAs either.
The ISA industry has responded to the criticism by working with four US aenators to craft a bill that would create a new ISA regulatory structure. Introduced July 19, it would give the Consumer Financial Protection Bureau formal regulatory authority over ISAs, require that borrowers receive a standard set of disclosures, and create more protections for low-income borrowers, among other provisions.
Even if it passes, it’s impossible to know whether it might halt the slide in ISA offerings.
“There was a lot of optimism that this was going to be the replacement for student debt,” says Linehan, who thinks that ISAs won’t make up more than 1 percent of education financing going forward. “I don’t think it’s going to make a material dent there.”
This story about income-share agreements was produced by the Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for our higher education newsletter.