In an Electronic Announcement published on March 2, the Department of Education’s Office of Federal Student Aid clarified that income share agreements (ISAs) used to finance expenses for postsecondary education are private education loans under ED’s regulations.
An ISA is a contract between an entity and student, where the student is provided money upfront for their education in exchange for a percentage of their future income to be paid to the entity over a specified time, among other terms. While not as commonly used as Title IV aid, ISAs have increased in popularity over the years.
ED defines private education loans as those “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.”
ED’s announcement reminds higher education institutions and their affiliated organizations making private education loans that they are required to comply with the requirements in the regulations, including critical disclosures, consumer protection, and reporting requirements. The regulations apply to all institutions participating in Title IV programs, including for students enrolled in programs that do not qualify for Title IV aid.
The disclosures and requirements are intended to ensure—
- Borrowers are informed
- Borrowers can choose their lender
- Transparency and high ethical standards in the student lending process, including a code of conduct for employees of institutions
- Institutions’ selection of preferred lenders based on the best interest of borrowers
- Institutions’ do not have revenue-sharing arrangements with lenders
The announcement comes after the Consumer Financial Protection Bureau issued a Consent Order in 2021 against a student loan originator for misleading borrowers about ISAs, failing to provide required disclosures, and violating the prohibition against prepayment penalties for private education loans. The CFPB concluded in the Consent Order that a student loan originator’s ISAs are private education loans under the Truth in Lending Act (TILA).
In a separate post, ED noted it “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. This information will help students and the public get the clearest picture possible of college-endorsed private student loans marketed to them.”