To many, ISAs are a potential silver bullet for the student debt crisis. The appeal is that ISAs would allow students to reduce their risk compared to loans. Loans stick students (and often, their families) with all of the risk if their education doesn’t pay off. Through ISAs, funders only make money if the students do, and students will never owe more than their earnings can support. In reality, however, funders can shape ISAs to quietly push much of the risk back onto students by crafting contracts that work to their advantage, avoiding consumer protections laws and aggressively marketing the alleged advantages of ISAs.
The program touted by Sorkin’s recent column, Lambda School, offers little public information about the terms of its ISAs, so it is difficult to assess its impact on consumers. Instead, we looked at Purdue University’s “Back a Boiler” program—perhaps the most prominent and acclaimed ISA programs in the United States. Back a Boiler illustrates how ISAs are not a solution to the high cost of higher education but rather another avenue for students to become trapped in debt. As a non-profit university with a vested interest in students’ success, Purdue’s ISA has been heralded as a model both for other universities and for legislative proposals, but our research uncovers major problems with Back a Boiler.
First, Purdue’s program includes less favorable terms for students in less profitable majors. In other words, if a student’s major increases the risk that the funder won’t recoup their investment—e.g., perhaps a student is more likely to become a teacher than an investment banker—then the ISA contract is adjusted accordingly. These students owe a greater percentage of their income for a longer period of time than peers in other, “more profitable” majors. Instead of sharing the risk of lower earnings, Purdue bakes that risk into the terms.
Second, Purdue’s contract minimizes its risk at the expense of students in other ways, including the repayment rules. By signing ISA contracts, students waive their rights to jury trials and class actions. Instead, they must resolve disputes through binding arbitration—a practice that has been roundly criticized in college enrollment contracts because of the ways they exploit students. Further, Purdue has written extreme collection practices into their agreements; they can collect the money owed directly from students’ state tax refunds and institute punitive terms if they fail to pay. Instead of offering a better alternative to student loans, these terms mimic the draconian punishments that critics cite as key problems with federal student debt.
Third, not only are these risks largely hidden from the public and would-be ISA applicants, the benefits are also oversold. ISAs like Back a Boiler exist on top of federal student loan debt (often after students have exhausted their federal student loan eligibility), rather than as a replacement for it. ISAs that are stacked on top of existing debt can lead to excessively burdensome education financing payments after graduation. Our research shows that when accounting for both federal student loans and an ISA, these monthly payments could be as high as 40 percent of pre–tax income for some students, further threatening their economic security.
Back a Boiler shows that even in the context of a public university, ISAs can be tilted against the interests of students, sometimes in ways that put them at risk of major financial peril. Congress could take action to prohibit predatory and unfair terms in these contracts, but unfortunately, the only ISA bills on the table at this point largely benefits investors. The Investing in Student Success Act would reduce risk to ISA funders by giving ISAs the favorable legal terms associated with student loans, like exemption from bankruptcy protections, while also declaring that ISAs are not loans to avoid consumer protection and disclosure requirements. Our forthcoming report will offer steps policymakers should take in order to ensure that students in these contracts are adequately protected: limiting stacked ISAs, shifting risk back from students to funders so that ISAs live up to their marketing, and banning discriminatory and predatory practices.
With $1.5 trillion in existing student debt, it makes sense that policymakers are seeking alternative ways to fund higher education. But until ISA models emerge that truly balance the risk between students and funders and adhere to commonsense consumer protections, members of Congress should focus on protecting students and take caution before promoting ISAs as a central solution to the student debt crisis. Otherwise, ISAs will merely be student debt by another name.
