On March 2, 2022, the U.S. Department of Education’s Office of Federal Student Aid (FSA) for the first time asserted regulatory authority over income share agreements (ISAs) as private education loans. FSA issued an electronic announcement to clarify its authority over income share agreements at institutions that receive federal aid under the Higher Education Act of 1965, as amended (HEA). An ISA is a contract in which a lender gives a student money for education, and in return, the student promises to pay the ISA-provider a fixed percentage of the student’s income for a set amount of time after graduation. The student may repay more or less than the amount received, depending on the terms of the ISA.
FSA’s announcement comes a few months after the Consumer Financial Protection Bureau (CFPB) concluded that ISAs are private education loans under the Truth in Lending Act and Regulation Z. As previously covered in this Subject to Inquiry article, the CFPB entered into a Consent Order with ISA-provider Better Future Forward, Inc. In the order, the CFPB determined that Better Future Forward’s ISAs were private education loans under Regulation Z since they “extended to a consumer expressly, in whole or in part, for postsecondary educational expenses.” 12 C.F.R. § 1026.46(b)(5). In January of 2022, the CFPB updated its Examination Procedures to directly address education loans, including ISAs. These Examination Procedures state that private education loans “sometimes take non-traditional forms such as temporary credits and income share agreements.”
FSA followed the CFPB’s lead and confirmed ISAs would be considered private loans moving forward. The FSA announcement explains that products like ISAs that meet the TILA and Regulation Z definition of a private education loan are also private education loans under the Higher Education Act and the Department of Education’s regulations. FSA noted that the definition of “private education loan” in 34 C.F.R. § 601.2(b) incorporates by reference the CFPB’s regulation, 12 C.F.R. § 226.46(b)(5). Accordingly, FSA will consider ISAs to constitute “a loan provided by a private educational lender that is not a title IV loan and that is issued expressly for postsecondary education expenses to a borrower, regardless of whether the loan is provided through the educational institution that the student attends or directly to the borrower from the private educational lender.” 34 C.F.R. § 601.2(b).
FSA’s announcement goes on to emphasize that higher education institutions must abide by their obligations associated with recommending, promoting, or endorsing private education loans, and clarifies that these obligations apply to ISAs. Postsecondary institutions should consider whether they are required to make additional disclosures and fulfill the regulatory requirements in 34 C.F.R. Part 601 regarding private education loans. Such additional disclosures may include statements on a website or in informational materials to prospective and current students to ensure “1) an informed student loan borrower, 2) the borrower’s choice of lender, 3) transparency and ethical standards in the student lending process, including the maintenance of a code of conduct for employees of institutions, 4) institutions’ selection of preferred lenders based on the best interest of borrowers, and 5) a prohibition on institutions’ revenue-sharing arrangements with lenders.”
FSA stated that additional guidance regarding private education loans and requirements under 34 C.F.R. Part 601 may be released in the future, and McGuireWoods will continue to monitor relevant updates.
