PJ Tabit
For those unfamiliar with income-share agreements, we’ll get into that in just a minute. But first I’ll introduce our speakers. The session moderator is Paul Fain. Paul is a veteran higher education reporter now focused on connections between education and work. He writes The Job newsletter for Open Campus Media and is a senior fellow with Strada Center for Education Consumer Insights.
Next is Cheye-Ann Corona. Cheye-Ann is a Senior Policy and Government Affairs Associate for Western States at the Center for Responsible Lending, where she provides technical assistance and policy expertise to state partners seeking policy reforms on small-dollar and student lending. Currently, she leads CRLs income share agreement work. Prior to this, Cheye-Ann worked on The Hill, where she focused on issues related to homeownership, economic inequality, labor, education, and financial services.
And finally, we have Ethan Pollack. Ethan is the Director of Jobs for the Future‘s new initiative, Financing the Future, which seeks to reimagine the way we finance education and training investments. Prior to joining JFF, Ethan spent five years at the Aspen Institute’s Future of Work Initiative and has also worked for the Pew Charitable Trust, Economic Policy Institute and the National Commission on Fiscal Responsibility and Reform, and the U.S. Office of Management and Budget. So, Paul, I will turn it over to you.
Paul Fain
Thanks, PJ. And thanks to the Federal Reserve for hosting us. This is going to be a good discussion. So I’m going to get right into it. One of the reasons I’m jazzed about the topic here is because income-share agreements feel like one of the more intriguing, interesting, and important developments in how folks pay for college or how to pay for college. And it’s also hard to predict where experts in this space are going to come down on the issue, which is rare in the higher ed policy. But first, before any of that, we have a poll for you. I’m going to turn it back to our organizers with the Federal Reserve to administer this poll.
Organizer
All right, everyone. You should be seeing a poll pop up in Slido. Go ahead and answer that. And Paul will talk us through some of those results.
Paul Fain
Well, I may have to ask you to talk us through that.
Organizer
Sure. No problem
Paul Fain
.through those since I’m not seeing [inaudible].
Organizer
Yeah, no problem.
Paul Fain
Sorry about that.
Organizer
It’s looking like everyone is rating their understanding of income-share agreements around a three on a scale of one to five.
Paul Fain
That’s pretty good.
Organizer
… a four and then a five. So definitely on that latter half.
Paul Fain
Great. Well, thank you. And thanks for helping me to read those results. So I’m going to give you my definition of what an ISA is. I call it when students agree to pay a certain percentage of their future income over a set period of time in exchange for funding of their educational program expenses. The devil in the details here is the story, as you can tell by my language and that definition, certain percentage, set period of time, et cetera. A small but growing number of colleges and other post-secondary providers are trying income-share agreements. They include Purdue University, the University of Utah, as well as several small private colleges and a few of the boot kind of camp providers.
ISAs have some appeal across party lines in part because they create an arrangement that shares some attributes with income-driven repayment plans for federal loans. But many critics, including Senator Elizabeth Warren, says ISAs are just another form of private loan. So I’m going to get right into it. Let’s start with Cheye-Ann. Can you give us your overall take on income-share agreements and how you define them if I got that wrong and really interested in kind of the philosophy behind them and what you think of that?
Cheye–Ann Corona
Yeah, sure. Thanks, Paul. Thanks, PJ, and thanks to the Federal Reserve for putting this together and having me here today. As far as ISAs go, I think we would probably agree with Senator Warren on her take. We see ISAs as a loan, even though in some of the marketing and the claims around ISAs, for those that are proponents of it, say that it’s not a loan and that it’s not credit.
And so for us, we are very wary of the product as it stands, because right now it’s sort of the wild wild west for these income-share agreements out there because there isn’t really a lot of uniformity across the board, and there’s no current regulations that are… or they’re not currently regulated, even though we think that they could be and should be by existing consumer law.
Paul Fain
Great. Thank you. And let’s let Ethan answer that same question. Just general take on this vehicle.
Ethan Pollack
Sure. So I see income-share agreements as part of a broader landscape of innovative finance. And I think that… which also includes, I think, deferred tuition, merit-based lending, retail installment contract. And in income-based repayment, there’s some emerging kind of private versions of income-based repayment that mirror but are not exactly the same as kind of the federal approach. But I think all of these can be important tools in kind of aligning incentives, unlocking additional capital investment, creating financially sustainable programs, expanding access, and improving affordability.
I think the upside is potentially very high, and therefore these deserve to be kind of experimented with. But as Cheye-Ann alluded to, these also can be misused. In particular, ISAs can be misused to obscure the true cost of education and training and potentially charge students more than they’re expected to pay. So my feeling is that the upside of income-share agreements, in particular, is high enough that these should be… that we do encourage experimentation. But we want to make sure that’s done so in a responsible way, make sure that it’s done so in a student-centered way. And one in which we’re also centering equity as well.
Paul Fain
Great. I want to get to some of the ways to do that. But let’s start with what you both see as the potential here. I mean, at this point, Utah and Purdue are big institutions. I’m not sure the scale of those experiments, but they’re definitely experiments, as last I heard before the pandemic when this was one of the only hot topics. Now we’ve got so many competing issues that higher ed’s dealing with. But how big do you think this can get? And let’s start with Ethan.
Ethan Pollack
That’s a good question. It depends on kind of where you’re looking. So I think that actually, where I am most excited about is actually not income-share agreements in the context of traditional of the traditional higher ed kind of Title IV system. We already do have the federal financial aid system. We already have income-based repayment. We have a variety of different income-driven repayment options there. I am encouraged to see universities be experimenting with income-share agreements. But I think really where there’s a lot of value add is more in kind of the non-Title IV, non-degree kind of more workforce training space. I think that’s one that also is more consistent with the broader idea of kind of outcome-based financing.
In traditional higher ed, we care about a lot of things beyond just whether someone gets a job, right. We see higher ed as also being creating a full citizen. And whereas with workforce training, it really is how do we most efficiently get people skills that are then aligned with what the labor market’s looking for? And in that sense, I do think that income-share agreements and other forms of innovative finance can really go a long way in kind of making this market actually work better. And making sure that it is… That a lot of the schools that are competing for students in this marketplace are competing on the basis of quality and not on the basis of how big their marketing budget is.
Paul Fain
Just quickly before I turn it over to Cheye-Ann for that question. When you talk about non-degree credentials being maybe the most… where the most potential could be for ISAs. Can you talk about the sort of providers and the sort of programs? You don’t have to name names unless you want to where this might make sense. I mean, I mentioned boot camps. We all know about the kind of tech-focused coding boot camps. But anything beyond that space?
Ethan Pollack
Certainly. So, I mean, it’s important to remember that we oftentimes think of kind of the shiny objects, like boot camps, and I think that they are important. But one of the biggest providers of non-degree credentials is community colleges. And so there are a lot of very traditional institutions that are also providing this type of education. These institutions kind of span these two different worlds of kind of degree and non-degree credentials. But there’s a variety of other kind of vocational schools as well.
And this is a market that has long kind of been relatively small, not as emphasized in this country compared to a lot of other countries. But one which if we are thinking about how do we make sure that we are giving people pathways to success and potentially more shorter-term, less expensive alternatives for higher education, then I think that building on this market, having a substantial public investment as well, but also making sure that the competition in the private market is one that is centered around student outcomes is I think the way to go.
Paul Fain
Just a clarifying question. When you talk about non-degree credentials from community colleges, are we talking potentially about non-credit, non-Title IV financial aid bearings of students who can’t qualify for a Pell Grant or other aid could use an ISA for a non-credit program?
Ethan Pollack
Certainly. Yeah. And that includes also just kind of short-term programs. There’s currently debate around whether to expand Pell eligibility to short-term programs as well. I would consider kind of a lot of these short-term programs in kind of this more skills training workforce development space too.
Paul Fain
Absolutely. Yeah. Short-term policy, different panel. Another hot one. So Cheye-Ann, can you talk, I mean, both about what you see as this scale here that they’re there. Is this a flash in the pan or one of those things that’ll be boutiquey and nevermore? And also in that sense, because as someone who I think falls more on the critic side of things, what sort of risk are you worried about in terms of student borrowers?
Cheye–Ann Corona
Yeah, sure. So there was market prediction for ISAs that was, I don’t know, put out sometime early last year that said by the end of 2020, there was going to be about 175 institutions with ISAs. Now I don’t know if that prediction came true or not. Ethan’s shaking his head saying no. But I think that is where we would be concerned. Right. So if there was that amount of ISA providers and they were unregulated, there’s a lot of dangers and pitfalls there where, again, the products from… the product to product, from school to school, from institution to institution vary.
There’s a lack of transparency with pricing. You don’t always know what you’re getting into. Some of these agreements have arbitration clauses, which means you can’t take them to court. You have to settle outside of court with a mediation agreement that usually often favors the institution, let’s say, that you can’t repay those ISAs. And I can get into the list of… I don’t know if I should do that here, a list of other sort of concerns that we have.
But I did also want to touch on some of the for-profit conversation and things that Ethan brought up. In terms of what we saw at the end of or during the 2008 recession. We saw a large increase in enrollment in for-profit schools. And so for what happened, and as a result, I’m sure a lot of folks have seen the headline where it’s saying, “Biden has forgiven $1 billion of student loan debt.” And that’s for the folks that were defrauded after the 2008 crisis.
So a large amount of folks enrolled into for-profit for vocational training around that era and are now suffering from having a degree, having… Well, so not having a degree, not having a degree that’s worth much because they were taking out loans and then their school closed. It was unaccredited. There was all these issues.
And so there was the borrower defense to repayment rule that came out. And so, a lot of folks were able to get that debt canceled now, but it was sitting during the Trump administration. And so, we’re a little bit concerned that those types of things could creep up again with the COVID era pandemic economy. So we’ve seen some advertisements from some of these ISA providers, from some of the coding boot camps that Ethan referenced that are saying, “Hey, come to our school, we can give you this great career vocational workforce development training, and you just take out an ISA. It’s easy. It’s not a loan.”
And so, some folks, I think that are in vulnerable situations that may be desperate to further their career, further their workforce training, can be caught into some of these traps where it’s predatory. And then again, there isn’t a whole lot of regulation right now or any regulation on ISAs. And so quality of education concerns. There’s the potential for taking on debt burden concerns all within that sort of vein. So that those are some of the things that we’re a little bit wary of and would not like to see history repeat itself in that sense.
Ethan Pollack
If I could just-
Paul Fain
And just to… Yeah. Please do.
Ethan Pollack
If I could just jump in real quick. I mean, I do think it’s helpful to separate, although not entirely separate. But for the purpose of this conversation, there is a question about the financing mechanism, and there’s also a question about the quality itself. And I think that what Cheye-Ann highlighted, what happened in the last recession, I think very much resonates with me. I mean this is something where there was a lot of students that got sucked into a lot of schools that did not work for them, and I really do worry that will happen again.
And in particular, oftentimes happens during recessions. But that’s the case, whether there are ISAs or whether there aren’t. That you have this market that oftentimes is predatory for students I should say, some of the for-profit schools do seem to have outcomes where they perform very well for students, but many of them also do not.
And the challenge here is kind of if we’re going to have that market, then the question is, should they be paid on the basis of upfront tuition, or should they be paid on the basis of whether their program or whether their students succeed or not once they have attended that school? And I think one of the promise of ISAs is actually that it can make it more difficult for a predatory school to exist. Because if what they’re providing is really low-quality education and the students are not succeeding after graduation, then the school itself gets paid less than they otherwise would have if they have students that are performing very well.
Now, I should say that link between kind of the student outcomes and then the school’s financial incentives, just because the school has an ISA, that link is not automatic. There are ways for schools to have an ISA but include a bunch of other kind of terms in their contract that shift the risk back onto students. So that’s why it’s really important to do this responsibly. But I do want to say that one of at least the promise of ISAs, the potential of ISAs, is that they can actually make it so that it is more difficult for predatory schools to kind of exist in the marketplace.
Paul Fain
I want to turn it back to Cheye-Ann here. But first, on the Q&A. Please do type your questions in there. And while I failed to be able to see the poll, I should be able to see your questions, and we want to leave some time for that. Cheye-Ann, Ethan talked about kind of the market for higher ed right now, and we’ve all seen the enrollment numbers for community colleges. Its catastrophic decline.
10% overall, this fall. I just saw Tri-C in Cleveland, Cuyahoga Community College, down 33% for Black male students this fall. So when you think about that, can ISAs… I’m guessing what you’re going to say here, be a solution to encourage enrollment in quality programs. I mean, and if not, how worried are you in terms of equity here, given a lot of these programs are generally serving lower-income, Black, and Latino students.
Cheye–Ann Corona
Yeah. I mean, I’m sure for the climbing number. I mean, I’m a product of a community college. I always like to shout that out. I was a transfer student, went to community college, first-generation college student. And so I think for a lot of these families, especially right now responding to what… Life has been kind of flipped upside down for a lot of folks, and the priority may be earning income, right. Is not maybe to go to back to higher, or go to school, go to college, get a degree.
It’s the urgent need is immediate. It is, “I need to put food on the table for my family, help my mom, help my dad,” help whoever is in your household. And so I think with ISAs, what the concern is that it’s a really shiny thing, that product that folks are saying, “Oh, well, this is new. This is innovative.” And it’s actually not a new concept. Milton Friedman came up with it in the 1940s and ’50s and wrote a couple papers about it. But I think for the four-year institutions that may have this as a way to finance your higher education. I think the concerns there are dependent on the majors that folks enroll into.
We know that there’s a lot of or a lack of people of color and women in STEM fields, and those are usually the higher earners. And so, there’s potential for ECOA violations or Equal Credit Opportunity Act violations because of the way the ISAs are priced and financed. I’m sorry, are priced for repayment. So the algorithms are such that it’s based on your potential earning, right. So what is your earning potential?
And so if I’m an English major, I’m a liberal arts major, which happens to be a majority of women and people of color, unfortunately, in this case, then you are likely paying more. And so I think that’s an issue there. The other thing is just that, again, with the dangers is that the way that these products are marketed. It’s deceptive to say, “This is not a loan. This is a new fancy product that you just come get your education, and then what? You still have to pay this money back.”
And so, I think it’s similar to income-driven repayment programs that are existing. I think while the federal income-driven repayment programs are flawed, I do think that there is a similar structure here, and again, we need regulations for this. We need to make sure that we are recognizing that the existing consumer protections can be used to regulate these products. And that would make me feel a whole lot better for students of color that are entering into these ISAs that there is somebody watching out for them. And that there is somebody saying, “Hey, let’s make sure that these borrowers are protected.” And so that’s kind of how we… I think I layered a lot of things in there, but that’s kind of how we see it.
Paul Fain
Yep. Thank you. So, Ethan, anything you want to respond to, please do. But first, I did want to ask. I mean, a lot of nuance in getting this right, assuming that it can be done to avoid some of the predatory lending we saw in the past. Can you talk a little bit about some of the best practices you’d like to see in terms of regs, rules, and industry engagement?
Ethan Pollack
Yeah, definitely. So I think that there’s the best practices that industry can do. There’s then… I mean, first off. I do want to kind of second what Cheye-Ann is suggesting in that policymakers need to engage with this issue and that this is something where… I wouldn’t agree with the characterization that they are unregulated. There is general agreement that ISAs are subject to at least some, if not most regulations that also apply to traditional consumer credit. There is a question about whether they apply to… whether some of the kind of federal laws apply to them. So it’s really a question of kind of do things like the Truth and Lending Act and ECOA, which Cheye-Ann mentioned. Do those apply? And if so, how?
I would argue that policymakers need to think of really about that how question. So, for example, traditional consumer credit loans need to disclose APR, right. And that’s largely based off of an interest rate. Well, income-share agreements don’t really have an interest rate, at least not an explicit interest rate. So there’s kind of an… And how much you’re going to be repaying is largely dependent on your income.
So an APR is a difficult thing to disclose. I think that providers should disclose APR, though. I think that is an important disclosure tool for consumers to do comparison shopping. And we need to figure out a way to disclose either a single APR for income-share agreements or to disclose a range of APRs so that consumers are able to kind of compare income-share agreements to each other and also to other forms of credit.
So that’s something that I think both should be incorporated into both regulation but also something that I think the industry should be doing on its own. I will also say that I think that the industry so far should probably… needs to do a better job of organizing itself. It is still relatively new. But at the same time, it needs to coalesce around some best practices and for hopefully kind of some model disclosure forms. Some of the ISA disclosures I’ve seen are really great, and others are not so great and very complicated.
And so I think that they need to be kind of organizing themselves. And then, honestly, I think they need to be proactively engaging with regulators, both at the federal and the state level, and saying, “We want to work with you. We want to make sure that what we are doing is consistent, not just with the letter of the law as we see it, but also the spirit of the law and making sure that students and learners are protected.”
And then also working to… Maybe there’s some additional protections that are necessary because ISAs are relatively unique in certain ways where it may be that we need more protections for consumers that take out ISAs than for traditional loans. I can make an argument in variety of ways that consumers are maybe at a little more risk, and therefore we should have a stronger regulatory regime for ISAs than for traditional loans. So I think that’s kind of the direction forward. And I think that without kind of creating a really intentional regulatory regime for ISAs, this market will never really fully mature, and I don’t think it’ll ever fully reach its potential.
Paul Fain
Great. So we have some interesting questions there. I’m just going to start jumping into them. Most federal student loan borrowers haven’t had to make payments in over a year, and I’m going to add there’s now discussions of free community college at scale. We’ll see if that happens. The Biden administration looking at a three trillion new spending plan. So if these things happen and given that borrowers haven’t made payments in a year, how can an ISA provider compete with that? Let’s start with Ethan. That’s an easy one, right?
Ethan Pollack
Yeah. It’s a great question. So actually, this recession is highlighted. What I would say is actually one of the interesting features of an ISA which is the downside protection. We have this moratorium on paying back student loans, but the federal government had to make a decision about that, right, and actually had to put that in the law. With ISAs, if you’re not getting a job you’re automatically not paying.
And so it is baked into the wiring of ISAs, rather than with loans. It’s something that kind of an external party or the loan holder has to actually turn off to provide relief. So I think that… I know there’s been a lot of pain made about ISA funds not performing as well as they were projected because we hit a recession.
And a lot of those students weren’t getting jobs once they were graduating in the spring of 2020. And I would argue that’s actually, that’s the point. That the point is that ISA shift risk from students, onto schools, onto impact investors, philanthropy, et cetera, and that during the recession automatically, students aren’t repaying. Now to the question specifically of how do they compete? I hope that ISAs actually aren’t competing with federal student loans.
I think that federal student loans kind of have a slightly different goal with them. And I think the federal student loan system itself should be made more robust. I think that we should have automatic enrollment into income-driven repayment. I think the term should be loosened. So I think that ISAs, at best, can be… The goal is not to take market share away from federal financial aid but rather to expand the market so more people have access to affordable education.
Paul Fain
Great. Thanks. Cheye-Ann, want to jump on that one?
Cheye–Ann Corona
I mean, I’ve had the same. I was like, “Yeah, that is a good question. How do they compete?” No. I mean, I don’t really have anything to add there. I would like to actually make one comment, though, about the previous thing we were talking about when it came to regulation. And I think that existing… We have TILA, ECOA, all these existing consumer protection laws, which we would say ISAs can be regulated under.
But I think the question is, do regulators and policymakers know that. And I think in a lot of different states, we’re seeing enabling legislation for ISAs, which will carve out terms and various things which can get very dangerous. So I just wanted to add that little footnote from before.
Paul Fain
Great, thanks. This one is for you, Cheye-Ann. “If ISAs were regulated like loans, would you support using them for beneficial programs that aren’t covered by Title IV?
Cheye–Ann Corona
That’s a great question. And I think we are also figuring that out as an organization. But I think that… I would say personally, and taking off my CRL hat, and say that I think that provides a little bit more… It gives me a little bit more comfort, I would say. Is that if you can’t stack on top of federal student loans. If there’s some guardrails there and some of these programs are fully philanthropic, right.
Like you have the Colorado Mountain College model or some of these other models that are just trying to come to a self-regenerating fund. And I think those… I mean, there could be some something there. So I mean, we would like to see what the market looks like with full regulations and for schools that cannot access Title IV funds.
Paul Fain
Another question here. “Do ISA contracts generally consider benefits, examples, being unemployment benefits, stimulus checks, et cetera, to be income that you pay on?” And I don’t know the answer to that. Do you, Ethan?
Ethan Pollack
I do.
Paul Fain
Oh, great. Great.
Ethan Pollack
Yeah. Yeah. So I have not reviewed every single ISA contract, but from all the ones that I have reviewed, they do not include those types of benefits. They are largely either strictly just salary or if they are more expansive than they are, including things like capital gains and dividend income and other types of unearned income in… I haven’t seen any that include inheritances. I think it’s more just kind of I think more. Some include kind of business income, and some do not. But in terms of benefits from government, I have not seen any that have included that.
Paul Fain
We’ve a pretty sophisticated audience here, Ethan. I don’t mean put you on the spot. But any providers or underwriters or institutions, or even contracts themselves, you recommend that folks take a look at for a good example of the nuance here. I’m not asking you to endorse anyone but for further research.
Ethan Pollack
Sure. So where I am actually most excited in the market is not necessarily like the for-profit space but rather ways that philanthropy, and the workforce system, and governments themselves are able to really leverage their constrained budgets to expand their services to more people. And as Cheye-Ann alluded to, also creating kind of these like Evergreen funds. So I mean, this is kind of the dream of a philanthropic organization, right. Is that you contribute a one time… make a one-time contribution to set up a certain fund, and then it perpetuates indefinitely, right. Because each cohort is paying back, and that they’re basically creating a revolving fund. That is a possibility. That is something that some mission-driven organizations are trying to do.
San Diego Workforce Partnership is one, so the Workforce Board out in San Diego, they’re now a couple years into this experiment. And I know there’s a number of others. New York City’s Economic Development Corporation is another that will be launching their ISA fund probably, I think, in early summer. So there are a few organizations that are facing constrained budgets that I wish just had bigger budgets to be perfectly honest. But given kind of the status quo that they are in, they are seeing ISAs as a very powerful tool to be expanding the change that they’re able to make. And that for me is very exciting.
Paul Fain
Thank you. Cheye-Ann, you mentioned Colorado Mountain College, but on the other side… I’m putting you on the spot too. Any providers or underwriters that give you particular pause, and if not, that’s fine?
Cheye–Ann Corona
Yeah. I mean, generally, CRL, we don’t like to call out certain industries or uplift the other industries, but I will say that email education, lease. There’s a couple of these for-profit coding boot camp ISA providers. I mean, there’s different models of this, right. Direct to consumer or through these coding boot camps and others that do give me pause.
I mean, in California, there was a whole lawsuit about the accreditation of some of these coding boot camps, which some of them it’s just like, “Go on YouTube and teach yourself.” Right. And so I’m going to pay 15,000, 10,000, maybe I’m exaggerating, dollars for that, and that can come in the form of an ISA. So I would say those are the ones that are a little bit more murky than I think some others.
Ethan Pollack
Could I actually just add-
Paul Fain
Yeah.
Ethan Pollack
Just add onto that because Cheye-Ann brought up the California example. I think the California examples actually really interesting. So California had cracked down on two different coding boot camps that were offering ISAs. And the boot camps agreed, or at least one of them that I know of, agreed to for California residents not offer an ISA, but instead offer another type of innovative finance that was more… that looked a little more like a traditional loan. So what they did is, instead of doing an ISA, they did a retail installment contract. So the repayment is still as a share of income, and it still has kind of that threshold if you make under a certain amount that you don’t pay. The only difference is that once you’re done… That with an ISA, at a certain period of time, it just ends.
Right. So even if you don’t repay the quote-unquote, principle, the financial obligation is over. Under the retail installment contract, they have to continue paying until they pay back what the tuition was. And so I think that, ultimately, the retail installment contract for many students may actually be a worse outcome than what previously was the ISA. And so, I think what you’re seeing is you’re seeing a lot of regulators trying to kind of fit ISAs into certain kind of boxes. And sometimes that may result in something that’s better for students, but sometimes it may actually result in an outcome that may be… It may result in a school using a different financial instrument that is actually worse for students or at least worse for lower-performing students.
And so I think that’s a… To me, that feels like a cautionary tale in making sure that we are actually centering this conversation, not around just kind of fitting ISAs potentially as a round peg into a square hole. But actually, starting off the conversation around what do students need? What are the consumer protections that best protects students from kind of predatory agreements? And in that sense, I do think that I’m not sure that California went in exactly the right direction there.
Cheye–Ann Corona
If I can just jump in. So we just submitted a letter with the Student Borrower Protection Center and the National Consumer Law Center to California is what they’re forming is the DFPI, which is sort of the California’s version of the CFPB. And so we kind of outlined what we think with that new regulator in California, they could be doing to look at some of these ISAs, and earn wage access products is the other sort of products here. So I think that Ethan brings up a good point, and I think that we have to be nuanced in some ways. And thankfully, we have [inaudible 00:37:56] to do that here at CRL and write up all those nuanced policies and how they fit into current or proposed regulation. So just thought I dropped that in there.
Paul Fain
So a very quick. I’m talking 30 seconds if you can do it, Ethan, on this question. If you’re an ISA provider, why not just do a loan with IDR? Why reinvent the wheel? What’s the innovation here that’s necessary?
Ethan Pollack
That’s such a great question. And the reason is because IDR does not have the ability to be financially sustainable unless you’re supplementing other revenue, right. Because an IDR is basically taking a traditional loan and then adding on downside protection, but someone has to pay for that downside protection. So either you are hiking an interest rate beyond what the normal market is, in which case, everyone is paying for the downside protection. And it’s basically a loan product with an insurance product attached to it.
Or you’re hiking the tuition and just making the tuition more expensive, or you go with an ISA approach, which is that the student… that the downside protection is paid by the students who are doing better than average, right. And the students that do better average than cross-subsidies the students who are doing worse than average. And so, again, the reason for an ISA is because it’s a way, I would say, to do kind of a financially sustainable fund that does not require subsidy in one way or another and instead kind of exists in perpetuity.
Paul Fain
Well, that was impressive and we’re-
Ethan Pollack
In 30 seconds?
Paul Fain
Maybe not quite, but you’re very close. To both of you, Cheye-Ann, Ethan, I learned a ton here. Well done. Thanks for doing this, and thanks to PJ and the Federal Reserve for hosting us.