SEARCH TODAY'S NEWS ARCHIVES

Does New Regulatory Agreement in California Offer Glimpse Into Future Federal Regulatory Action?

By Owen Daugherty, NASFAA Staff Reporter

California regulators plan to apply more oversight to income-share agreements (ISAs) and will now treat them as private student loans under California’s student loan servicing law, the California Department of Financial Protection and Innovation (DFPI) announced Thursday.

DFPI announced it had entered into a "landmark agreement" with Meratas, Inc., a New York-based company that enables schools to issue ISAs to students.

“Today’s action shows we are taking significant steps to better protect California student borrowers,” DFPI Senior Deputy Commissioner Suzanne Martindale said in the announcement. “Regulating income share agreements like student loans levels the playing field and creates a fair marketplace that protects all consumers.”

ISAs are an alternative type of financing to pay for education where a borrower receives a loan and then pays a fixed percentage of their income for a set period of time after they graduate. ISA providers are not student loan companies and typically partner with institutions of higher education but up until now have faced little regulation from state or local agencies.

As a financing tool, ISAs have garnered an outsized amount of attention relative to their actual use, which has been limited to a small number of schools.  Despite their slow growth among traditional colleges and universities, they have become more common among alternative education and training providers. California is now the first state to formally regulate ISAs with its agreement to enter a partnership with Meratas. 

As part of the agreement, Meratas will be required to be licensed as a student loan servicer in California, meaning it will have to follow rules set out by law, including providing accurate information to borrowers and allowing state regulators to review its records. 

“Because income share agreements do not fit neatly into existing federal or state legal regimes, we felt it prudent to be proactive at the state level, starting with California," Meratas Founder and CEO Darius Goldman said in a statement. "We are excited to work with the DFPI in its efforts to craft ISA-specific regulations for the benefit of all industry participants."

Meratas works with schools to offer income-share agreements and manages those products for the schools. The company will now be subject to oversight from the state as part of the agreement.

The terms of the agreement between DFPI and Meratas could set the stage for future regulation of the growing ISA industry. Additionally, it raises questions as to whether ISAs could be regulated at the federal level and which agency would be tasked with doing so, whether it be the Department of Education (ED) or another federal agency such as the Federal Trade Commission (FTC). 

Lawmakers have previously introduced legislation aimed at improving and providing oversight of ISAs to ensure they include consumer protections for borrowers.

Additionally, while ISA providers often reject being categorized as private student loans, if California is in effect treating them as such, it means there are significant implications for financial aid offices who often ensure compliance with preferred lender lists and other similar financial agreements. 

 

Publication Date: 8/9/2021


You must be logged in to comment on this page.

Comments Disclaimer: NASFAA welcomes and encourages readers to comment and engage in respectful conversation about the content posted here. We value thoughtful, polite, and concise comments that reflect a variety of views. Comments are not moderated by NASFAA but are reviewed periodically by staff. Users should not expect real-time responses from NASFAA. To learn more, please view NASFAA’s complete Comments Policy.

Related Content

2020 Presidential Candidates' Higher Education Proposals

MORE | ADD TO FAVORITES

Free College: A Three-Part Series

MORE | ADD TO FAVORITES

VIEW ALL
View Desktop Version