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Students feel duped by Purdue's Back a Boiler loan program. Could it be illegal?


Muda69

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https://www.indystar.com/story/news/education/2022/05/18/purdue-back-a-boiler-loan-program-students-income-contract/9590978002/

Note: Story is behind a paywall.

Quote

THIS IS NOT A LOAN.

It’s stamped clearly in big, black lettering across the top of Henry Feldman’s income share agreement contract with Back a Boiler – ISA Fund, LLC. The fund will kick in $29,491 towards his out-of-state tuition at Purdue University and, in return, Feldman will pay back 10% of his future income for 100 months.

It says it again, in all capital letters, in the agreement terms: THIS IS NOT A LOAN OR CREDIT.

The marketing materials say it, too. The Back a Boiler homepage assures you: “You don't have to be saddled with debt. There's a creative alternative.” As recently as May 2020, the website said: “It’s not a loan. And you’re not alone.”

That alternative is an income share agreement, in which a student gets a portion of their tuition paid in exchange for agreeing to pay back a percentage of their future income for a set length of time – usually around 10 years. According to one watchdog group, the way Purdue is running the program may also be illegal.

Purdue University President Mitch Daniels has been a champion of the income share agreement. They're part of the brand he's crafted for himself as an innovative leader, not afraid to challenge the status quo in higher education. In 2019, he wrote about the “powerful alternative to student loans” in an opinion piece for the Washington Post, which may be why Purdue has become one of the leaders on this front.

 

It was the first major research university in the nation during the modern era to offer an ISA program — something that had been largely relegated to non-degree-granting entities, such as computer coding boot camps.

It’s also why students like Feldman felt safe signing up for the program. University marketing told them not to worry — they were banking on themselves, and their future success — and their university was going to help them, while sidestepping the burden of private student loan debt.

The only problem? Income share agreements are private student loans, at least in the eyes of the Consumer Financial Protection Bureau. The federal agency responsible for consumer protection in the financial sector recently cracked down on another ISA provider for falsely representing that its ISAs are not loans and do not create debt.

That prompted the U.S. Department of Education to remind the nation’s colleges and universities about the rules around how they may interact with private student loan and credit products – rules that the Student Borrower Protection Center say make what Purdue is doing illegal.

Purdue has “brazenly ignored these limits and responsibilities as part of a scheme to drive its students to take on risky, high-rate private student loans," the nonprofit alleges in a letter to the education department.

Daniels declined an interview request from IndyStar. In an email, a university spokesperson denied the allegations and said that Purdue “takes seriously its commitment to make sure Back a Boiler participants are fully aware of their repayment obligations in advance of entering into any agreement.”

IndyStar spoke with several families that say they didn’t fully understand the agreement. If they had, they wouldn’t have signed it.

......

Even after six years, Purdue is one of a small fraction of colleges and universities with access to federal aid that offers an ISA program.  

In general, ISAs operate by a student pledging a percentage of their future earnings in exchange for tuition money. There is a set number of monthly payments a student must make before their obligation is met — for the Back a Boiler program, it's usually between eight and 10 years. Once they make that number of payments, their contract is fulfilled whether they’ve paid more or less than what they originally borrowed. The only way to end the contract early is by hitting the payment cap, the maximum amount an ISA recipient can be on the hook to pay.

This amount can range. Some programs ensure students never pay back more than they borrowed. In most cases, though, the payment cap is higher than the amount borrowed. In Purdue’s case, it’s typically 2.5 times the original amount. So a student who signs an ISA contract for $10,000 would pay back, at most, $25,000.

For students whose careers get off to a slow start or who aren’t making much, it can be a good deal – depending on the terms. There is a chance that a student would pay back less than they borrowed or at least has an end date in sight for paying off the contract, as opposed to private loans that students can pay for decades.

There’s also a six-month grace period before payments start after a student leaves school and payments aren’t required if a student is making less than $20,000 annually.

But the private student loan industry is also highly regulated and has protections for borrowers that ISAs like Back a Boiler don’t have, which watchdogs say is one of the ways the program is breaking the law. For example, traditional student loans aren’t allowed to penalize borrowers for paying off their loans ahead of schedule.

Back a Boiler has no such protection in place. If that student that borrowed $10,000 wants to pay it back immediately upon graduation, they must pay back the “max cap” amount on the contract – typically $25,000 on a $10,000 agreement.

This is where Buhr feels stuck. She signed one ISA during her sophomore year of school for $15,000. She can either pay 5% of her income every month for 112 months – the terms of the agreement – or pay off the max cap immediately.

In Buhr’s case, that’s $37,500.

Caveat Emptor rears it's ugly head again.

 

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6 hours ago, Muda69 said:

*its

There is something sickeningly wrong with the financing of higher education, and it's going to give the USA a dysgenic future if we don't act. 

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