California Moves to Extend Consumer Protections to Income Share Agreements

Income Share Agreements will be treated like student loans under proposed new rules

The California Department of Financial Protection and Innovation (DFPI) is proposing new rules to protect individuals participating in Income Share Agreements.

Income Share Agreements are made when a student receives funding for school - from an organization or financial institution - and then agrees to repay that funding by way of a share of the student's future income over a fixed period of time.

These agreements vary from traditional student loans in that they are directly tied to the current student's future income and the repayment amount or percentage is fixed.

The proposed rules clarify that education financing products, including but not limited to income share agreements and installment contracts, are student loans and that servicers of such education financing products are covered by California's Student Loan Servicing Act and must be licensed.

The licensing process and oversight provided by DFPI are designed to provide an additional layer of protection for students who may face challenges when/if they are unable to repay the loans.

The move in California comes as student loans are receiving new attention in response to President Biden's recent student loan debt relief announcement.

“For years, the student loan system has had numerous design flaws that led financially distressed borrowers to accrue excessive amounts of interest that has been capitalized over and over again, stopped borrowers from obtaining administrative relief, and resulted in many borrowers falling into default,” said Kyra Taylor, staff attorney at the National Consumer Law Center.

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