California’s coming for fintech’s student loan solution

The Golden State says income share agreements are student loans. But the income-based payback deals still mostly operate in a legal gray area with little oversight and scant clarity about how they work and who benefits.

An illustration of a diploma alluding to criticisms of income share agreements

Who benefits from income share agreements?

Image: Christopher T. Fong/Protocol

A recent order by California regulators classifying income share agreements as student loans could have a wide-ranging impact on how these financial instruments are handled nationwide.

Income share agreements are either a ticket for economic mobility or a deceitful debt trap preying on students, depending on whom you talk to. Most are structured so recipients pay a percentage of their future income rather than a set, interest rate-based payment. But ISAs still operate with little oversight in a legal gray area, with basic questions about how they work and who benefits still unanswered.

That debate has only gotten more complex as regulators start to weigh in. A recent order by the California Department of Financial Protection and Innovation deemed income share agreements as student loans in the latest indication of changes in the evolving world of student loan replacements.

The federal Consumer Financial Protection Bureau has also made moves to take on ISAs. This month, the CFPB issued a consent order against Better Future Forward, an ISA provider, saying it misrepresented its products by saying they're not loans and do not create debt, and did not comply with consumer laws on private student loans.

The state and federal orders come amid a continuing increase in graduates' debt load and a revenue shortfall for many colleges, which has a number of students and educators looking for alternatives to traditional student loans.

ISAs have been growing quickly in popularity for short-term coding bootcamps and traditional colleges, as well as for other training and education programs such as nursing.

Golden State standard

California's order licensed Meratas, a 2-year-old firm, to service ISAs being offered by schools and colleges in California. Now, income share agreements will be regulated as loans under the California Student Loan Servicing Act. That means Meratas will have to communicate "honestly and fairly" with borrowers and submit data to the DFPI, which it didn't have to before, and Meratas' data, complaints, documents and borrower details are now subject to periodic review by the DFPI, said Maria Luisa Cesar, its deputy commissioner.

This new oversight by regulators also means borrowers in California will have protections from deceptive lending practices, usury, unfair credit reporting practices, unfair collection practices and discrimination, said Ben Kaufman, head of investigations and senior policy adviser at the Student Borrower Protection Center.

But the bigger impact of the order could be across the country. Until recently, income share agreements were not regulated much, if at all. The New York Department of Financial Services could follow California's move, said Mike Pierce, policy director and managing counsel at the SBPC.

Recently, Illinois passed the Know Before You Owe Private Education Loan Act, which defines ISAs as loans alongside traditional private student loans and requires disclosures of interest rates on ISAs based on the borrower's income. It also requires lenders to provide detailed statements to borrowers along with additional requirements for ISAs.

And in a recent panel, Rohit Chopra, who's nominated to be head of the CFPB, said companies offering ISAs should compete on price and product, not on "regulatory arbitrage" — a clear critique of ISAs.

"Companies often use these alternative structures to avoid consumer protections and other laws," Chopra said. "I've long been concerned that marketers of income share agreements might claim that their products are a debt-free or interest-free option, and our laws help prevent these types of unsubstantiated claims."

Currently, Meratas is the only company with this California license. Other companies can also apply for licenses using the Nationwide Multistate Licensing System, a registration system used for non-depository financial institutions, Cesar said.

From an industry perspective, California's licensing of ISAs is an improvement, said Tonio DeSorrento, chief executive at ISA company Vemo Education, even if it's not written how he would've liked, because it will provide more certainty for the market.

Vemo focuses on offering ISAs through colleges — it has 65 college customers and non-college clients as well, said DeSorrento. Unlike others, when Vemo works with colleges, the schools cover the students' tuition and the students pay back the colleges, he said. Vemo only handles communication with students, processing and servicing, he added.

In most cases, Vemo's partner schools are subsidizing the cost of tuition that the student is not paying and losing some money since it's part of financial aid, DeSorrento says. But for colleges, this is worth it because it is an attractive feature to draw more students to enroll, as it shows that colleges actually care that their students are successful, he said. "Having financial skin in the game communicates something important to students and parents," he said.

Vemo and its partner coding academy Make School were sued in July by 47 former Make School students, who alleged that the school didn't inform students of the costs of the ISA-powered program. And last year, two nonprofits — the SBPC and the National Consumer Law Center — filed a complaint with the Federal Trade Commission, alleging deceptive marketing that resulted in unexpected costs.

DeSorrento said the FTC case was a complaint filed with the FTC, and the FTC hasn't taken any action. On the Make School case, DeSorrento declined to comment.

Who benefits?

In the regulatory shuffling that's ongoing, there are still some basic questions that haven't been answered:

  • Are students paying more for ISA loans than they would have paid in a traditional student loan or other personal loan?
  • Who's benefiting?
  • Are income share agreements enforceable like loans are?
  • Finally, what exactly is an ISA, and what isn't?

That's hard to know, because many ISAs are packaged and securitized to large investors. It's hard to compare the student cost of typical student loans with income share agreements because it can vary depending on a student's future income, DeSorrento said. But, he added, the majority of the ISA programs Vemo runs are subsidized by colleges, so they compare well with "any loan option."

In Make School's lawsuit, the plaintiffs have argued that the loans were not legally sanctioned loans, so the companies can't force borrowers to pay them back. A ruling in this case could have an enormous impact on the ISA industry.

"The position that we've taken is ... not only can you not sue a borrower if they don't pay you, but attempting to collect a debt that is unenforceable and that you know is unenforceable is also a violation of a number of other California consumer protection laws," said SBPC's Pierce, a former official on student loans at the CFPB.

Some companies, such as coding academy Lambda School, now offer what are known as retail installment contracts in California instead of ISAs. Lambda in August 2020 entered into a settlement with the California Bureau for Private Postsecondary Education where it agreed to only offer installment contracts in the state. But some advocates argue that Lambda has just changed the name of the product and is still essentially offering ISAs.

When you can't even agree on what a financial product is, it's clear that more changes are coming.


A pro-China disinformation campaign is targeting rare earth miners

It’s uncommon for cyber criminals to target private industry. But a new operation has cast doubt on miners looking to gain a foothold in the West in an apparent attempt to protect China’s upper hand in a market that has become increasingly vital.

It is very uncommon for coordinated disinformation operations to target private industry, rather than governments or civil society, a cybersecurity expert says.

Photo: Goh Seng Chong/Bloomberg via Getty Images

Just when we thought the renewable energy supply chains couldn’t get more fraught, a sophisticated disinformation campaign has taken to social media to further complicate things.

Known as Dragonbridge, the campaign has existed for at least three years, but in the last few months it has shifted its focus to target several mining companies “with negative messaging in response to potential or planned rare earths production activities.” It was initially uncovered by cybersecurity firm Mandiant and peddles narratives in the Chinese interest via its network of thousands of fake social media accounts.

Keep Reading Show less
Lisa Martine Jenkins

Lisa Martine Jenkins is a senior reporter at Protocol covering climate. Lisa previously wrote for Morning Consult, Chemical Watch and the Associated Press. Lisa is currently based in Brooklyn, and is originally from the Bay Area. Find her on Twitter ( @l_m_j_) or reach out via email (

Some of the most astounding tech-enabled advances of the next decade, from cutting-edge medical research to urban traffic control and factory floor optimization, will be enabled by a device often smaller than a thumbnail: the memory chip.

While vast amounts of data are created, stored and processed every moment — by some estimates, 2.5 quintillion bytes daily — the insights in that code are unlocked by the memory chips that hold it and transfer it. “Memory will propel the next 10 years into the most transformative years in human history,” said Sanjay Mehrotra, president and CEO of Micron Technology.

Keep Reading Show less
James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.

Ripple’s CEO threatens to leave the US if it loses SEC case

CEO Brad Garlinghouse said a few countries have reached out to Ripple about relocating.

"There's no doubt that if the SEC doesn't win their case against us that that is good for crypto in the United States,” Brad Garlinghouse told Protocol.

Photo: Stephen McCarthy/Sportsfile for Collision via Getty Images

Ripple CEO Brad Garlinghouse said the crypto company will move to another country if it loses in its legal battle with the SEC.

Garlinghouse said he’s confident that Ripple will prevail against the federal regulator, which accused the company of failing to register roughly $1.4 billion in XRP tokens as securities.

Keep Reading Show less
Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at or via Google Voice at (925) 307-9342.


The Supreme Court’s EPA ruling is bad news for tech regulation, too

The justices just gave themselves a lot of discretion to smack down agency rules.

The ruling could also endanger work on competition issues by the FTC and net neutrality by the FCC.

Photo: Geoff Livingston/Getty Images

The Supreme Court’s decision last week gutting the Environmental Protection Agency’s ability to regulate greenhouse gas emissions didn’t just signal the conservative justices’ dislike of the Clean Air Act at a moment of climate crisis. It also served as a warning for anyone that would like to see more regulation of Big Tech.

At the heart of Chief Justice John Roberts’ decision in West Virginia v. EPA was a codification of the “major questions doctrine,” which, he wrote, requires “clear congressional authorization” when agencies want to regulate on areas of great “economic and political significance.”

Keep Reading Show less
Ben Brody

Ben Brody (@ BenBrodyDC) is a senior reporter at Protocol focusing on how Congress, courts and agencies affect the online world we live in. He formerly covered tech policy and lobbying (including antitrust, Section 230 and privacy) at Bloomberg News, where he previously reported on the influence industry, government ethics and the 2016 presidential election. Before that, Ben covered business news at CNNMoney and AdAge, and all manner of stories in and around New York. He still loves appearing on the New York news radio he grew up with.


Microsoft and Google are still using emotion AI, but with limits

Microsoft said accessibility goals overrode problems with emotion recognition and Google offers off-the-shelf emotion recognition technology amid growing concern over the controversial AI.

Emotion recognition is a well established field of computer vision research; however, AI-based technologies used in an attempt to assess people’s emotional states have moved beyond the research phase.

Photo: Microsoft

Microsoft said last month it would no longer provide general use of an AI-based cloud software feature used to infer people’s emotions. However, despite its own admission that emotion recognition technology creates “risks,” it turns out the company will retain its emotion recognition capability in an app used by people with vision loss.

In fact, amid growing concerns over development and use of controversial emotion recognition in everyday software, both Microsoft and Google continue to incorporate the AI-based features in their products.

“The Seeing AI person channel enables you to recognize people and to get a description of them, including an estimate of their age and also their emotion,” said Saqib Shaikh, a software engineering manager and project lead for Seeing AI at Microsoft who helped build the app, in a tutorial about the product in a 2017 Microsoft video.

Keep Reading Show less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories