On Tuesday, Sens. Todd Young (R-IN), Marco Rubio, (R-FL), Mark Warner (D-VA), and Chris Coons (D-DE) introduced the ISA Student Protection Act of 2019, legislation that would establish guidelines and add consumer protections to income-share agreements (ISAs), which are gaining attention as alternatives to traditional student loans, but are currently unregulated.
ISAs replace traditional loan concepts like principal balances, interest rates, and repayment periods with a contract that requires recipients to pay a certain percentage of their income for a fixed period of time. ISAs are offered by institutions, financial institutions, and not-for-profit organizations. There is currently no statutory or regulatory guidance on ISAs, which has contributed to concerns about borrower protections from consumer groups and hesitancy among institutions to offer them.
The bill establishes that ISAs are not considered credit, and that ISA providers are not considered creditors, as those terms are defined in the Truth In Lending Act (TILA). Therefore, disclosure and timing requirements under TILA do not apply.
The bill sets a minimum income (200% of the Federal Poverty Level), below which ISA recipients would not be required to make payments based on a percentage of their income. For recipients with incomes below 225% of the poverty line, monthly payments could not exceed the monthly payment obligation on a comparable loan with an annual percentage rate of 36%. Social Security old age, survivors, and disability benefits; Supplemental Security Income (SSI); and amounts received under the Child Nutrition Act of 1966 such as the National School Lunch Program and the Women, Infants and Children (WIC) Program would not be included as income for purposes of calculating the monthly payment. However, a provision specifies that income from sources other than employment may be considered income for the purposes of determining ISA payment amounts for individuals who choose not to work and have a significant source of non-employment income. A maximum $25 monthly payment would be permitted if the recipient’s income was below the specified minimum established for requiring a payment based on income.
For ISA recipients whose incomes were above the minimum specified above, the percentage of income to be paid on the ISA would be capped at between 7.5% and 20% of income, depending on the length of the contract. The longest contract permitted would have a term of 30 years, but could be extended by the number of months that the recipient was not required to pay a percentage of their income because it fell below 200% of the poverty line.
The bill would also require disclosures from ISA providers to students comparing ISA payments to the payments that would be required under federal or private loans for the same amount of money received and with the same timeframe for repayment. ISAs would be required to specify individual rights with respect to default or delinquency, overpayment or underpayment, death or disability, and service as a member of the armed services. ISAs executed prior to the date of enactment of this bill would have 180 days to comply with this requirement. The bill would also require disclosure of the terms under which such contracts could be terminated. Unlike student loans, ISAs would be dischargeable in bankruptcy.
The bill specifies that neither funding received through ISAs nor any difference between the ISA amount received and the amount ultimately repaid would be considered taxable income. It also specifies that amounts received from ISAs are not considered income or assets for the purposes of calculating the Expected Family Contribution.
While prior versions of this bill have been introduced in the House and Senate in prior sessions of Congress, this latest iteration is the first Senate bill with bipartisan backing. The Department of Education is also considering using its experimental sites authority to offer ISAs.
Publication Date: 7/19/2019