My colleagues and I have the privilege of advising numerous clients on income share agreements (ISAs), including universities, service providers, and institutional investors. So we were excited by reports that the U.S. Department of Education (ED) plans to publish a Federal Register notice for an Experimental Sites Initiative (ESI) that would facilitate ISA programs at Title IV schools.
Under an ESI, ED seeks to test out new approaches to financial aid by waiving certain Higher Education Act requirements. This forthcoming ESI—called “Institutional Investment in Student Success”—would permit a small number of selected schools to limit their students’ federal borrowing, repay federal student loans on behalf of students, or both.
Specifically, ED’s intention is that participating schools would:
- Limit federal loan borrowing, including at the program level (based on expected earnings data reported by the College Scorecard), credential level, or year in the program;
- Use institution-provided loan reduction or forgiveness programs to reward students for reaching academic benchmarks; or
- Create an innovative institutional financing program that has “unique benefits to students not available in the Direct Loan program,” such as an ISA program.
The institutional financing program envisioned by ED would be funded primarily from a combination of Direct Loan proceeds (the school would take assignment of the loan and could repay ED as a lump sum or over time) and institutional or private funds.
Schools selected to participate in the forthcoming ESI would be required to offer the deferment, forbearance, and discharge rights available under the Direct Loan Program, adhere to “applicable Federal or State laws that apply to consumer credit,” and exclude from their programs any “unreasonable” repayment terms such as “unfair” interest rates, fees, or other financing terms.
Some of these requirements are not, strictly speaking, applicable to ISAs. For instance, consumer credit laws are only applicable by analogy because an ISA is not a credit product. However, universities with existing ISA programs generally offer their students legal protections and benefits similar to those enjoyed by federal student loan borrowers.
ED is expected to publish a Federal Register notice in the near future inviting letters of interest from institutions who would like to apply for the ESI.