FSA Clarifies Income Share Agreements Will Be Treated as Private Student Loans

By Owen Daugherty, NASFAA Staff Reporter

On the heels of the Consumer Financial Protection Bureau (CFPB) announcing it had reached a first-of-its-kind settlement with an income-share agreement (ISAs) provider over alleged misleading practices, the Office of Federal Student Aid (FSA) posted guidance this week clarifying that it views ISAs as private student loans.

In guidance issued Wednesday, FSA made clear that ISAs used to finance a student’s postsecondary education are considered private education loans under the Truth in Lending Act.

Additionally, the guidance reminds institutions of higher education of “their obligations when recommending, promoting, or endorsing private education loans” under the Truth in Lending Act.

The notice comes as ISAs are growing in popularity, though they still make up a relatively small subset of the loans borrowers take out to pay for their education. 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.

Up until recently, ISAs have faced little regulation from state or local agencies. California last year became the first state to apply more oversight of ISAs when it announced it would treat them as private student loans under California’s student loan servicing law.

CFPB’s notice set the stage for action from the federal government from an agency perspective, and the guidance Wednesday is the first from FSA or the Department of Education (ED) regarding ISAs and further makes clear how ISAs will be treated moving forward.

FSA stated that institutions and institution-affiliated organizations must comply with the private education loan requirements in the Truth in Lending Act, including critical disclosure, consumer protection, and reporting requirements.

As a reminder, regulations are applicable to all institutions that participate in Title IV programs, including for students enrolled in programs that don’t qualify for Title IV aid, FSA added.

A blog post from ED, written by Office of Postsecondary Education Chief of Staff Rich Williams, further details the guidance and the rationale behind the increased oversight.

“It is the department’s responsibility, along with other financial regulators, to protect students and consumers and to clarify how regulations apply to existing and emerging products,” Williams writes.

FSA also said it plans to provide future guidance on the topic to ensure students and the public get the clearest picture possible of college-endorsed private student loans that are marketed to them.

“The department plans to work with other federal partners to provide, later this year, additional information to colleges on how to further improve the accuracy and consistency of reporting on requirements related to preferred lender arrangements,” the post concluded.


Publication Date: 3/3/2022

Jeff A | 3/3/2022 10:31:50 AM

FSA seems to not recognize a common scenario where the institution is offering the ISAs, and using an ISA servicing platform very similar to any institutional loan servicing platform. While the requirement to comply with TIL is new, and easily accomplished, there is not necessarily 3rd party financing involved. I've done a small amount for two years with zero financing costs, and including the free income insurance. Better terms than FDL, but consumers don't understand them, and they are usually referenced negatively by the loudest voices, so perhaps much ado about nothing so far.

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