Sunday, March 25, 2018

Protect Your Children from Income Share Agreements

Loans are Understood and Predictable

Many children have been hurt by large student loans.  I remember an article about a medical doctor who borrowed so much money to become a doctor that she would be paying on her loans to the day she died and would never be able to own a home.

Many young people do not understand loans.  Their parents need to guide them through the process of borrowing money for college.  There have been many night-mare stories of huge debt and meager incomes.  But there are formulas and on-line calculators that allow you to calculate the monthly bill for a loan given the loan amount, interest, and the length of the loan payoff.  With a tool like this you can analyze your potential debt before you commit to the debt. If you google "Loan Repayment Calculator, " then you can see something like this:
(Click on the image to see it expanded.)  You can see that a 6% loan of $20,000 will take $491.05 monthly to pay off, meaning you pay back $29,463, which is $9,463 more than you borrowed.  Many kids graduate with more than $20,000 of debt and many young people will find paying 4491.05 a steep cost.

A $40,000 yearly income, and 28% taxes means a young person will have (40000 * (1 - 0.28))/12 = $2400 per month income and $491.05 is 20% of the monthly income.  Try living in an urban area for less than $1200/month for rent and utilities.  Now you can picture $491.05 as 41% of the remaining $1200 a month after rent and utilities.  A student loan is a serious commitment, but mathematics and planning can lead one to project the economic consequences, including the total cost of the loan.

Income Share Agreements are New and Poorly Understood

Some universities started debt instrument called a Income Share Agreement (ISA)as an alternative to student loans.  Investors wanting to make money off of your children have turned to Congress to pass laws making it easier and safer for them to loan money to your children.

After reading the details of these bills, here are my concerns.
  1. The congressional bills strip away state laws that protect your children from excessive interest rates or claims against their income.
  2. Your children cannot escape a bad ISA through bankruptcy.
  3. These ISAs have an equivalent interest rate and the interest your children pay on ISAs is not tax deductible like a regular loan.
  4. Senate bill S.268 amends the Investment Company Act of 1940 to strip away protections we might have from this law. 
Details from the bills (and web links to them) are at the bottom of this blog posting.

Banks can already loan money to our children, but banks are regulated.  Now a new batch of investors want to own our children's debt without the regulations currently in place to protect our children.  No one can imagine at this time how bad this could be for our children.  We can write our congressmen to protest these bills, but we must surely warn our children to avoid these debt instruments until the dangers are understood.

Your friend and neighbor,

Senate Bill S.268 — 115th Congress (2017-2018)

Introduced in Senate (02/01/2017)

Investing in Student Success Act of 2017

This bill authorizes an individual (i.e., a student) and another person (i.e., an investor) to enter an income-share agreement (ISA) in which the student agrees to pay a percentage of future income, for a specified period of time, in exchange for funds to pay for postsecondary education, workforce development, or other purposes.

An ISA that complies with specified terms and conditions and meets certain disclosure requirements is a valid, binding, and enforceable contract and is not subject to state laws that limit interest rates or regulate assignments of future income.

The bill amends the Internal Revenue Code to include an ISA as a qualified education loan (a qualified education loan is not dischargeable in bankruptcy), but it prohibits a tax deduction for interest paid on an ISA (interest paid on a qualified education loan is tax deductible).

The bill amends the Investment Company Act of 1940 to exclude as an investment company any person whose business substantially consists of making ISAs.

House Bill H.R.3145 — 115th Congress (2017-2018)

SECTION 1. Short title; table of contents.

(a) Short title.—This Act may be cited as the “Investing in Student Achievement Act of 2017” or the “ISA Act of 2017”.

SEC. 201. Lawfulness of contracts; preemption of State law.

Any income-share agreement that complies with the requirements of section 102 shall be a valid, binding, and enforceable contract notwithstanding any State law limiting or otherwise regulating assignments of future wages or other income.

SEC. 202. Preemption of State law with respect to usury.

A Qualified ISA shall not be subject to State law with respect to usury, unless such State law was issued after the date of the enactment of this Act and such State law expressly states that it is intended to apply to income-share agreements.

SEC. 203. Preemption pre-existing State laws with respect to ability-to-repay and licensing laws.

A Qualified ISA shall not be subject to a State law with respect to “ability-to-repay” requirements, and an ISA funder issuing a Qualified ISA shall not be subject to any State law with respect to licensing or registration, unless such State law was issued after the date of the enactment of this Act and such State law expressly states that it is intended to apply to income-share agreements.

No comments: