Does New Regulatory Agreement in California Offer Glimpse Into Future Federal Regulatory Action?
NASFAA
Owen Daugherty
August 9, 2021
California regulators plan to apply more oversight to income-share agreements (ISAs) and will now treat them as private student loans under California’s student loan servicing law, the California Department of Financial Protection and Innovation (DFPI) announced Thursday.
DFPI announced it had entered into a “landmark agreement” with Meratas, Inc., a New York-based company that enables schools to issue ISAs to students.
“Today’s action shows we are taking significant steps to better protect California student borrowers,” DFPI Senior Deputy Commissioner Suzanne Martindale said in the announcement. “Regulating income share agreements like student loans levels the playing field and creates a fair marketplace that protects all consumers.”
ISAs are an alternative type of financing to pay for education where a borrower receives a loan and then pays a fixed percentage of their income for a set period of time after they graduate. ISA providers are not student loan companies and typically partner with institutions of higher education but up until now have faced little regulation from state or local agencies.
As a financing tool, ISAs have garnered an outsized amount of attention relative to their actual use, which has been limited to a small number of schools. Despite their slow growth among traditional colleges and universities, they have become more common among alternative education and training providers. California is now the first state to formally regulate ISAs with its agreement to enter a partnership with Meratas.