Income share agreements (ISAs) rose to public awareness this year — if measured in press articles and discussion on “VC Twitter” — after several years of niche experimentation among a small community of education advocates. An ISA in a financing model where the student participates in an education program without paying tuition, then pays a certain percentage of their income for a set period of time in return.
As I mentioned in my analysis of ISAs back in April, there is rapid growth in ISA pilots by traditional universities in the US and by vocational training programs but there’s also a lot of regulatory uncertainty. This isn’t a scenario where private sector leaders are seeking less regulation and activists wanting more: private sector leaders are actively lobbying more regulation so there are protections against discrimination and predatory behavior — many fear one bad actor ruining the reputation of the entire movement — and are seeking legal clarity on a range of issues like the tax implications of an ISA on all parties involved.
The ISA Student Protection Act is currently making its way through Congress with bipartisan sponsorship from Senators Todd Young (R-IN), Marco Rubio (R-FL), Mark Warner (D-VA), and Chris Coons (D-DE). The Department of Education’s Diane Auer Jones said the department is planning to pilot an ISA program, to which Senator Elizabeth Warren issued a letter demanding detailed explanation of the plan and the potential negative impacts.
I asked several of the entrepreneurs, investors, and policy experts at the forefront of ISAs to share their perspectives on the current state of the ISA movement:
- Tonio DeSorrento, Vemo Education
- Ethan Pollack, Aspen Institute
- Shaan Hathiramani, Flockjay
- Austen Allred, Lambda School
- Alison Griffin, Whiteboard Advisors
- Sam Lessin, Slow Capital
- Terri Burns, GV
- Kristen Sharp, Entangled Solutions
- Leo Polovets, Susa Ventures
- Jan Lynn-Matern, Emerge Education
Here’s what they had to say…
“What’s been really fascinating, in recent years, is the innovation that is occurring at colleges and universities that are using ISAs to support and improve student success.
Unlike traditional financing mechanisms, ISAs can play a much more integral role as broader, institution-wide strategies like retention and completion. We view that sort of institution-backed ISA as fundamentally different from direct-to-consumer approaches that risk perpetuating many of the same challenges — and inequities — as private loans. ISAs will be successful when institutions are intentionally designing programs that align with goals for retention, completion, and enrollment.
The recently proposed federal legislation is an important step in clarifying some of the regulatory frameworks around ISAs, and we’ll continue to work with policymakers and providers to ensure that the ISA community takes a thoughtful approach from the outset – so that we can fulfill the potential of the model to increase access and affordability.”
“There are few regulations at the federal or state level explicitly designed to govern the operation of ISAs, and there is a lack of clarity on how consumer protection laws apply to ISAs. Policymakers should design regulations specifically for ISAs, detailing what terms and conditions could be offered and how they are disclosed to students, and ensuring that providers cannot “cherry-pick” students.”
“Student loan debt is not only crippling for college grads, it is an empty promise where educators have no accountability or incentive to support their alumni in getting a job. 90% of students list getting a good job as the primary reason for going to college, yet 43% of graduates start underemployed, and 50% of those remain underemployed 10 years later.
ISAs are promising as they force educators to have accountability and business incentives to support their students after graduation. I welcome regulation for ISAs so that there is a level playing field between different financing options, and transparency for students that are highly motivated to invest in themselves.”
“Responsible ISAs rewrite the economics of getting an education by removing cost as a barrier to entry and aligning the incentives of school and student. When schools don’t get paid until their graduates do, they’re incentivized to provide a service that actually gets students hired. That’s really what ethical ISAs enable: a risk-averse path to higher education and ultimately, social mobility, that works for a diversity of students. Lambda School graduates’ success to date is proof of that. Long-term, it’s critical that ISAs are federally regulated to ensure terms are responsible, ethical, and keep students’ interests top of mind.”
“Although a growing number of education and workforce providers are using ISAs to connect the cost of education to labor market outcomes, after graduation, there are many more waiting for Congress to provide regulatory guardrails that ensure needed consumer protections. Regulation will bring critical stability to a growing category with lots of potential.
The good news is that legislation that would provide clarity to consumers, institutions and investors alone has sparked increasingly rare bipartisan collaboration in the Senate. I’m encouraged by movement on an ISA bill backed by lawmakers on both sides of the aisle who agree that ISAs can bring needed accountability, affordability and access to students looking for a new way to finance their postsecondary education.”
“At Slow we have been following themes in the income-share space and looking for great investments for years. It is clear to us that the fundamental thesis, which is that with more discontinuous professional outcomes and rising student debt levels forms of ISAs must happen in the US (as they already exist in many countries abroad).
In the last 12 months, the quality and volume of the income-share opportunities we have seen have dramatically increased, and we have made our first set of investments in companies like Vemo, AlmaPact, and Pando. We are seeing good movement towards responsible engagement from regulators in the space and believe in the coming years we will see a robust ISA ecosystem as part of the solution to some of the challenges of modern personal finance.”
“The regulatory market for ISAs is fairly nascent, making it absolutely critical that we pay close attention to the way ISAs are implemented, pushing for regulation that keeps ISAs fair and equitable. The fact of the matter is, ISAs can become a really powerful financing option that unlocks opportunities for large swaths of the population, or they can become the predatory financial system that critics fear, if we don’t shape the regulatory market appropriately now. Still, I’m optimistic about the potential of ISAs; they are a fantastic opportunity for an equitable marketplace where both educational institutions and students optimize towards success.”
“Instead of a loan, for which learners are on the hook even if their new skill/degree doesn’t pay off, ISAs provide a proof point that employers, education providers, and funding sources are all rooting for them.
From a regulatory perspective, transparency is the key. When students know exactly what they’re on the hook for and in what circumstances, ISAs work well. They make the launch points into new skills, degrees, or competencies seem more accessible.
I think the biggest hiccup is making very sure that students understand exactly what they’re paying back, under what circumstances, and for how long — and how it compares to how much they would have paid back under student loans. Traditional debt models will always be the right call for some students.
The other issue that jumps out at me is the equity question. How do you ensure that ISAs are offered to populations of students haven’t historically gone into big money-maker occupations at high levels? HBCUs, schools with lots of first-in-family college students, etc.”
“ISAs are a very exciting investment area. The economics of ISAs are attractive, and they enable people who may not qualify for traditional loans to afford income-improving products and services. ISAs are also superior to loans when it comes to aligning incentives between borrowers and service providers. There’s a lot of valuable infrastructure that will be built in this space, and I’m also especially excited about companies like Lambda School, Placement, and PassRight, which bundle ISAs with high-quality products.”
‘‘Education institutions are the key stakeholders that will make or break ISAs. Employability of students is the key variable that will determine ISAs’ attractiveness to investors. While the majority of bootcamps are geared toward employability, most still don’t publish their results. Most universities aren’t optimizing for employability as much as they could. To attract large scale ISA financing, universities will need to fundamentally rethink how they can better ensure employability.
Overall, we don’t see ISAs completely replacing traditional debt products – debt will remain the preferred choice for a large proportion of students. However, education debt and ISAs will co-exist and, in doing so, create more choice and competition, favorable to students.”
Update (10:30am PDT): An earlier version of this post incorrectly included sentences from the author as part of the quotes by Austen Allred and Alison Griffin due to a formatting mistake. This has been corrected and those sentences by the author were added to the introduction of the article for additional clarity.