Income share agreements: A loophole or a trap?

For would-be software engineers who couldn’t afford a bachelor’s degree, California’s Make School offered what seemed like an ideal solution. The two-year coding academy in San Francisco would pay students’ tuition and a stipend in exchange for a cut of their salary for several years after graduation, an arrangement called an income share agreement (ISA).

It seemed like a win-win. But 47 former Make School students filed a lawsuit on Thursday alleging a combination of deceptive marketing and predatory terms forced them to pay back far more than their degrees were worth. The lawsuit shows the pitfalls of using ISAs as an alternative to traditional student debt.

The use of ISAs is rare, but growing. In 2016, Purdue University became the first four-year school to launch an ISA program. Vemo Education, which builds ISA programs and is a co-defendant in the lawsuit, told U.S. News and World Report that fewer than 100 colleges offer ISAs. Investing advice website Benzinga reported the United States had $250 million worth of ISAs in 2019, a sliver compared to the nation’s more than $1.7 trillion in outstanding student loans.

In theory, ISAs incentivize schools to teach skills that will earn students high-paying jobs, creating a larger return payment. If Make School graduates earn less than $60,000 a year, they’re off the hook for payments, co-founder Jeremy Rossmann told MarketWatch.

But high-earning graduates may find the school’s cut is ultimately larger than the sticker price of a degree. The Make School graduates claim that after leaving, they could owe more than 27 percent of their income and be paying for 10 years. The lawsuit estimates the total cost of Make School ISA payments could be up to $250,000, four times the cost of similar programs.

The lawsuit against Make School also highlights alleged deceptive practices. The students claim the institution promised its financial interest in students’ success would guarantee a quality education, but then sold off its ISA accounts, separating its profits from graduates’ careers. The plaintiffs also say Make School hurried students into exploitative arrangements, waiting until some had relocated to San Francisco to provide the details of the agreements and giving others one day to sign or drop out. The school also allegedly downplayed details about how many ISAs students would need and cited misleading numbers to make its program look like a bargain compared to traditional degrees, according to the suit.

Some schools build safeguards into their ISAs. David Walker, Messiah University vice president for finance and planning, told U.S. News and World Report that the school guarantees its ISA students will not pay more than the cost of their degree. He pointed out that ISAs give students another path to funding their education and may help those who can’t pay up-front: “I hope all institutions would view missional value over financial value.”