Are income share agreements misleading student loan borrowers? A new federal complaint says “yes.”
Here’s what you need to know.
It’s no secret that college is expensive. The latest student loan debt statistics show that 45 million borrowers collectively owe $1.6 trillion of student loan debt. Are there alternatives to student loans? Income share agreements, or ISA’s, have been hailed as one alternative to student loans. Rather than borrow a student loan, ISA’s enable students to defer the cost of college in exchange for a fixed percentage of their post-graduation income for a fixed period of time. Would you give up a percentage of your future income to pay for college? Before making that decision, two non-profit organizations filed a complaint today with the Federal Trade Commission against Vemo Education for unfair and deceptive business practices related to its income share agreements. Vemo markets income share agreements at multiple colleges such as Purdue University as well coding bootcamps where borrowers may not qualify for student loans.
“The law couldn’t be clearer,” National Consumer Law Center attorney Joanna Darcus said. “This is a classic case of a company obscuring the true cost of its financial product to the detriment of consumers who are doing their best to comparison shop and to the detriment of lenders who are playing by the rules.”
The allegations, made by the Student Loan Protection Center and the National Consumer Law Center, state that Vemo violated the Federal Trade Commission Act in the marketing and promotion of income share agreements for students at certain universities. As a result, these marketing could lead to some borrowers paying thousands of dollars in unexpected costs for their income share agreements. According to the complaint, the allegations include:
1. Overstating the cost of other student loan options
Vemo’s comparison tools used incorrect information about student loan repayment terms for Parent PLUS Loans. This resulted in misleading borrowers about the true cost of their federal loan options.
2. Understating borrowers’ starting incomes
Vemo’s comparison tools used “outdated, misleading estimates” of graduates’ starting incomes, which understates the true repayment cost of an income share agreement.
3. Undercalculating income growth
Vemo’s comparison tools mislead borrowers about future income projections for borrowers who attended the University of Utah and Purdue University. As a result, ISAs appear to be a cheaper than student loans.
The allegations suggest that Vemo understates the true cost of its ISAs, when the financial product may be more expensive than traditional student loans. Vemo has not responded publicly to the allegations.
“Vemo lured students by overstating the cost of student loans made by the federal government while understating the cost of its ISAs,” Tariq Habash, Head of Investigations at the Student Borrower Protection Centerm said. “Vemo engaged in a deceptive marketing scheme that is predatory and dangerous to students…”
Should you get an income share agreement?
There are several advantages and disadvantages to an income share agreement. Your school, cost of higher education and your specific financial situation may help you decide whether an income share agreement is right for you—or whether it’s better to choose traditional student loans.
Income Share Agreement Pros:
- Students don’t have borrow to significant student loan debt.
- There are no principal or interest payments
- You only pay a percentage of your income.
- You only make payments when you are employed.
Income Share Agreement Cons:
However, not everyone thinks ISA’s are better than traditional student loans.
- Difficult to predict your future income
- Don’t have same protections as federal student loans
- Not offered at all schools
- Market is is largely unregulated