A few years ago Faith Chikwekwe came across a post on Reddit about a program that she thought would help her achieve her dream of turning her passion for coding into a career.
Chikwekwe liked that the organization, Make School, appeared to offer the quicker pace of a coding bootcamp with elements of a more traditional degree program. When she went to its website to learn more, Chikwekwe appreciated seeing photos of Black women like her. But one feature that really sold her on the program: the opportunity to attend without paying any money up front.
“For someone who was in my situation, it was everything,” Chikwekwe said of Make School’s financing option, called an income-share agreement, a deal where instead of paying tuition before enrolling, students pledge a portion of their future income after landing a job.
At the time, Chikwekwe couldn’t afford to spend tens of thousands of dollars on tuition on her salary as a phone sales worker, so she signed up for three income-share agreements. But a few months into her time at Make School, Chikwekwe started to feel wary of the agreements, which would have required her to fork over 25% of her pre-tax income for roughly three years and 7.5% of her income for another three years after getting a job post-graduation.
“It’s the type of money that changes your ability to live and your ability to live in a way that’s with dignity,” Chikwekwe said. She hustled to leave the school within a year of enrolling, so she wouldn’t have to take on more financing.
Now, Chikwekwe, 29, is one of 47 former students alleging they were misled about the cost of the agreements. They filed a lawsuit last week against Vemo, the company servicing Make School’s income-share agreements, and Make School Inc., the company that until recently operated Make School and is in the process of liquidating (Make School is now being operated by a nonprofit organization).
Are income-share agreements loans?
The suit comes as income-share agreements recieve increased attention from both supporters and detractors. To investors, philanthropists and the schools that offer them, ISAs are an innovative product that could help tackle the student debt crisis by allowing students to finance their education in a way that provides protection from a low income or job loss. That’s because students only make payments if their post-graduate income is above a certain threshold.
Supporters of ISAs have called for clearer regulation surrounding the agreements as a way to protect students.
But to consumer advocates, the agreements are loans by a different name. They say the push for regulation is actually a way to carve ISAs out from lending laws protecting borrowers from discrimination. They also worry about the way some coding programs that aren’t eligible for federal student loans use ISAs to attract low-income students.
“What we have seen time and time again is companies — whether on the education side or on the financial side — talk about disruption, or technological advances, or promises of a better future, but what this lawsuit shows is far too often this is empty promises and mounds of debt,” said Seth Frotman, the executive director of the Student Borrower Protection Center, an advocacy group for borrowers that supports the lawsuit.
The suit alleges that the two companies signed students up for ISAs during a period when Make School didn’t have the required approval from California’s Bureau of Private Postsecondary Education to operate. The ISAs issued during that time — between 2016 and 2018 — are therefore unenforceable, the suit alleges.
In addition, the suit claims that Make School and Vemo misled students about the true cost of the ISAs. Make School told students they could expect to pay about $100,000 for a full bachelor’s degree if they financed their education, according to the suit. In reality, the agreements could cost as much as $250,000, the lawsuit alleges.
Income-share agreements are paid back in one of two ways. Either the student puts a share of their income towards the obligation for a certain number of months or they hit the ISA’s payment cap.
In the case of Make School, the payment caps were between two and a half and three times the amount of funding provided, according to the suit. In addition, financing tuition and living expenses for the typical two-year duration of the program required multiple income-share agreements sequenced, essentially extending the payback period of the financing deal, the suit claims.
‘ISAs solved an unsolved problem in higher education — how can students who don’t qualify for student loans finance their college education?’
The suit alleges that many students weren’t told they’d need multiple agreements until after they’d already signed up for the first ISA and had a vested interest in finishing the program. Melody Sequoia, the attorney representing the students, called this practice “egregious.”
But the allegations also mirror one of consumer advocates’ concerns about ISAs more broadly — that students may struggle to understand their terms and true costs.
“ISAs were presented as new and novel and innovative, but they’re really not,” Sequoia said, noting that the federal student loan program allows borrowers to repay their debt as a percentage of their income. “This is a loan, even if they say it’s not. The reason it’s a loan is because the student doesn’t pay up front and instead they agree to pay more at a later time.”
Vemo declined to comment on the pending litigation, but said in a statement that the company supports creating a “legal framework to establish guardrails” on ISAs. “We are committed to ensuring that all students have the most transparent and reliable information on ways to finance their postsecondary education pathway,” the statement reads.
Proponents pitch income-share agreements as an alternative to debt
Jeremy Rossmann, one of the founders of Make School, wrote in an email that the full cost of the ISA was published and disclosed in writing for half a decade. Make School wasn’t trying to enrich itself, he said — the ISA program hasn’t turned a profit since 2014, according to Rossmann.
But payments on ISAs are “high for students earning high salaries,” he said, “because extending credit to low-income students is expensive and our ISAs have a built-in insurance policy: pay nothing if you make less than $60k/yr,” he wrote.
“It is devastating to see a group of alumni, on average wealthier than the faculty and staff who educated them, falsely allege that Make School unjustly enriched ourselves off an ISA program that existed solely to provide avenues of upward mobility to students regardless of their financial background,” Rossmann added.
Over the past few years, ISA proponents have pitched the agreements as an alternative to debt that better align incentives between students and their schools. The idea is that the better a student does, the more money a school earns on the deal.
The complaint claims that staff indicated to students that the company used the ISAs to receive funding from investors, allegedly telling them in a May Slack message that “[t]he ISA program relied heavily on investors purchasing the future payback of these loans in exchange for loaning Make School the money it needed to operate.”
‘It’s the type of money that changes your ability to live and your ability to live in a way that’s with dignity.’
Rossmann denied selling the ISA contracts to investors. “We are aware that many schools sold their contracts and we are proud to have never done so,” he wrote in the email to MarketWatch.
Make School no longer offers ISAs and its bachelor’s program is now operated by a nonprofit. The ISA contracts are now held by a company in the process of liquidating, according to the suit.
“ISAs solved an unsolved problem in higher education — how can students who don’t qualify for student loans finance their college education?” Rossmann said. “We grieve for the students who have lost access to the funding they needed to achieve their dreams as a result of this lawsuit.”
‘Trying to get back some of the financial time that I lost’
Chikwekwe, who also has about $40,000 in traditional student loans, said she never thought she’d have a nice thing to say about that type of debt. But after her experience with the income-share agreement, Chikwekwe said she appreciates the student loan program’s flexibility.
With the ISA, Chikwekwe she felt as if she had fewer options. For example, unlike a student loan, an ISA’s income share doesn’t adjust when family size changes, according to the lawsuit.
“Unless I lose my job or unless I decide to take a job that would pay me a very low salary there’s not really a way to have a break from paying,” Chikwekwe said of the ISA.
When Chikwekwe enrolled in Make School initially, she hoped it would lead her to a job that could help her save up for retirement and build some generational wealth — to “start to be more of a resource than a burden to my family,” as she put it.
Though she landed a job as a software engineer, the ISA combined with Bay Area rent ate up so much of Chikwekwe’s income that she couldn’t afford to save. She moved back home to Georgia. “I’m here with my family to just try to get back some of the financial time that I lost when I was paying the ISA,” she said.