College Students Are Being Misled About the Costs of Income Share Agreements, Consumer Groups Say

A prominent provider of an alternative financing tool for college and trade school programs is drawing fire from consumer advocates, accused of using incorrect information to make the products appear to be a better deal for students than they really are.

Vemo Education, which designs and manages income share agreements for colleges, uses deceptive marketing that could result in students paying back thousands of dollars more than anticipated, according to The National Consumer Law Center and Student Borrower Protection Center in a new complaint filed with the Federal Trade Commission.

Income share agreements (ISAs) are an alternative to loans where students get money upfront in exchange for agreeing to pay a certain percentage of their future income for a set period of time, typically 5 to 10 years. The funding for the upfront payment — which schools need to cover operating costs — comes from a combination of investors and non-profit foundations, which are then repaid when a student begins working. Students apply for the ISA through their school, much like they do for other types of financial aid.

The tools Vemo creates for its university clients “present a false comparison by systematically inflating the costs of comparator products and underestimating the costs of an ISA,” the complaint from the National Consumer Law Center and Student Borrower Protection Center alleges. (Comparator products are private and parent loans.)

Income share agreements are still a relatively niche product for funding higher education. The agreements rarely replace loans entirely at four-year colleges. Instead, they are most common at short-term skills training programs that don't qualify for federal financial aid. When used at four-year colleges, they're mainly an option to fill the gaps after a borrower has exhausted all of the federal student loans available.

Still, ISAs are growing. More than 70 schools have launched ISAs since 2016, Vemo says on its website. One of the largest programs, Purdue University’s Back a Boiler ISA Fund, has issued contracts worth $14 million to nearly 800 students. And in December, the Education Department said it planned to start an experiment with ISAs, though it hasn't released details since.

Advocates for the model say it can be less risky for students, since they won’t have to pay anything if they can't find a job with a high enough salary. And if a college uses some of its own resources to fund the ISAs, then the model can also link a student’s success with a college’s—a college won’t earn its investment back unless it helps a student get a decent-paying job.

But critics question whether a product designed to earn profits for investors can actually be in students’ best interests. Some predict investors will only want to issue ISAs for programs that lead to high-paying careers. If students do end up with high salaries, they can pay as much as two-and-a-half times what they originally used under the percent-based repayment model. Right now, ISAs lack regulations and consumer protections. Most carry forced arbitration and a pre-payment penalty, says Tariq Habash, head of investigations at the Student Borrower Protection Center.

In the complaint to the FTC, the consumer advocate groups focus on Vemo’s comparison calculators, displayed on the websites of colleges, including Purdue University and the University of Utah. The tools are meant to help students research how much an ISA will cost compared to other loans.

The complaint alleges that the tools use older, generalized salary data that are sometimes lower than actual reported salaries to project estimated earnings. As a result, the amount a student is project to pay via an income share agreement is deflated, since the income underlying the calculation is lower than other salary data report.

For example, Vemo’s tool on Purdue University’s website uses an average salary of $49,000 for accounting majors. Yet the Department of Education, which began publishing average earnings at colleges broken down by academic program last year, reports that accounting majors who graduated from Purdue earn an average $56,300 their first year out of college.

Using that figure, a student who had an ISA of $10,000 and agreed to pay about 3% of her salary over a period of 100 months would end up paying back $17,276, according to the complaint. That’s $2,240 more than the estimate Vemo’s tool provides using the $49,000 salary.

The complaint also says Vemo miscalculates annual income growth percentages and overstates how expensive Parent PLUS loans are. With the loans, Vemo assumes that a borrower with a PLUS loan will choose an in-school deferment, meaning the loan will accrue interest while a student is enrolled. But Parent PLUS loans — unlike federal student loans — are not automatically deferred, the parent can pay them any time.

Vemo representatives told Money that the company regularly updates its tools, and that some of the issues outlined in the complaint are based on older versions.

"We work tirelessly with our school partners to ensure that income share agreements are explained clearly and fairly to students," Jeff Weinstein, Vemo co-founder and vice president of strategic analytics, said in an email.

In response to the findings of the consumer groups, Weinstein explained that the salary projections are based on colleges’ own data, adding that they’re more up to date than the federal government’s data, which lag 2 to 3 years. (Colleges’ data on earnings is typically gathered through surveys of alumni. The Education Department’s is based on tax records.)

Vemo's salary estimates may appear lower because they also capture non-graduates and part-time students, not just students who graduated, as the Education Department’s data do, Weinstein said. To measure annual salary bumps, Vemo's partners have the option to use data from the College Scorecard or a blended model based on Scorecard data and data from the U.S. Census, he said. To make that information as user-friendly as possible, he says, the company displays a single annual percentage estimate even though the data suggests income doesn't always grow evenly year-to-year.

Weinstein also said there’s an update to the company’s tools coming out this summer that will address the issues raised with the PLUS loan calculations.

Purdue and the University of Utah, the other university that is used frequently as an example in the complaint, did not respond to requests for comment.

Beth Akers, an economist and senior fellow at the right-leaning Manhattan Institute who’s supportive of ISAs, says she doesn’t consider Vemo’s comparisons as deceptive. While there are merits to the issues raised in the complaint — that some of Vemo's assumptions make ISAs appear more affordable — there are other instances where Vemo's assumptions result in the loans that ISAs are compared to also looking more affordable than they may ultimately be, she says.

For example, Vemo estimates loans will be repaid in a standard 10-year window. But many borrowers take longer to repay their loans, and that would make the loans more expensive. Like Weinstein, she noted the tools presented an average salary that includes both graduates and non-graduates.

The company could design a tool where students answer dozens of questions to create a more individualized estimate, Akers, who's followed the ISA industry closely, says. But then it's possible students won't use the tool because it would be too burdensome.

The existing tool may not be the best, she says. But “I don’t think there’s an obvious improvement over what they’ve done that’s easy for consumers to use."

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