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.
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Purdue University President Mitch Danielshas 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.
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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.
“When you’re in college, you’re an adult but when it comes to loans…. You just sign up for this,” said Kaylee Buhr, a 2016 Purdue graduate. “You don’t really know what you’re getting yourself into.”
ISAs still rare at traditional schools
Income share agreements are not a new concept but, until the last decade, they were not common in the higher education space and the agreements still make up a tiny portion of the nation’s enormous student debt load.
Even after six years, Purdue is one ofa 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.
Back a Boiler:What people, Purdue are saying about controversial income share agreement
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 makingless 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 sophom*ore 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.
She said she’d happily pay off something more than the $15,000 she borrowed if she could pay it off today, but thinks the 250% is outrageous. She said she and her parents, who encouraged her to sign up, feel duped by the marketing. Had they understood this is the position she’d been in a few years out of school, they’d never have agreed.
IndyStar spoke with five students and their families whoshared similar sentiments, offeeling like the program was a good idea when they signed up but today, feel varying degrees of frustrated, disappointed and taken advantage of.
“You feel that this is a totally Purdue-backed program,” said Patti Feldman, whose son Henry borrowed $39,000 through two ISA contracts in his third and fourth years of school. “They’regoing to have your back, take care of their students. It almost sounded like an alumni program supports these graduates upon their first foray into the world.
“It has to be good because I’m in marketing. I was completely bamboozled.”
And now, she’s angry.
After trying to work through Vemo, the private company that services Back a Boiler ISAs,Feldman turned to Purdue. She received a letter explaining how ISAs work, the various pros and cons. She said she felt insulted by the response.
Like other families, Feldman said she’d pay off what her son borrowed and then some tomorrow if it meant he didn’t have to make the $900/month payments for his two ISA contracts for the next eight years. But his max cap is nearly $100,000. And that’s more than they can manage, she said.
“I have $144,000 (in loans) with the federal government,” she said. “I’m completely prepared to pay for that. But this is not fair."
In its response to IndyStar, Purdue said "transparency and ISA literacy are the hallmarks of Purdue’s Back a Boiler program" and the process is designed to ensure studentsmake an informed decision. Participants mustalso successfullycomplete a quiz prior to entering into an ISA contract to check understanding.
According to the university's website, more than 1,600Back a Boiler contracts have been signed.Purdue enrolls roughly 10,000 new students each year and serves nearly 50,000 students annually.
Watchdog asks education department to intervene
It’s not surprising that families are feeling duped, said Ben Kaufman, director of research and investigations with the Student Borrower Protection Center. That’s why the federal government has rules around colleges and universities co-branding credit products and offering “preferred lender” lists for student loan financing.
Last September, the Consumer Financial Protection Bureau cracked down on a different ISA provider for mispresenting its product and failing to comply with federal consumer financial law that governs private student loans.
Better Future Forward falsely represented that the ISAs it was issuing were not loans, failed to provide disclosures required by federal law and violated a prepayment penalty prohibition for private education loans, according to a consent order issued by the CFPB.
But the agency didn’t stop at admonishing Better Future Forward. It sent a warning to the entire industry, urging providers to fall in line with federal law.
“The ISA industry has tried to evade oversight by claiming that its products are not loans,” said CFPB Acting Director Dave Uejio in a news release. “But regardless of the name on the label, these products are credit and have to comply with federal consumer protections. The ISA industry cannot pretend that core consumer protection laws do not apply to their products.”
It was several months later that the U.S. Department of Education followed up with schools, reinforcing that ISAs are and must be treated as private education loans, "though they are often marketed as an alternative to conventional student loans."
With the CFPB and education department’s recent communications about ISAs and their classification as a private student loan, Kaufman said it’s clear that what Purdue’s doing with the Back a Boiler program is wrong.
“They’re putting their logo on a really risky credit product,” he said. “And at the end of the day, it’s not them whose financial lives are going to be ruined.”
It’s their students, he said.
And that’s why the nonprofit is asking the education department and CFPB to get involved.
“We lay out we think pretty clearly why this is risky for people, why it violates the law and why (the education department) can and needs to use the very robust tools already at its disposal to rein in this practice,” he said, “and basically put on the table everything up to Purdue losing access to Title IV funds.”
Title IV is a part of the Higher Education Act that allows students access to federal financial aid. Losing access to it would be “catastrophic,” Kaufman said.
Purdue has pushed back on the allegations in the letter sent to the education department.
“Despite the assertion in the letter, Back a Boiler is not a preferred lender arrangement under the Department’s preferred lender rules,” said Tim Doty, director of media and public relations, in the email to IndyStar.“Purdue is proud to offer income share agreements as an income-dependent alternative to private and Parent PLUS loans and thereby assume some of the financial risk our students face in uncertain futures.”
ISAs backed by investors
Purdue isn’t the only one assuming the risk, though – or reaping the potential reward.
There are two limited liability corporations that fund the contracts that students sign.
The first, which raised $6.3 million, was funded by three institutional investors, according to a news release from the university. An institutional investor is a company or organization that invests money on behalf of clients, entities like pension funds, mutual funds, money managers, insurance companies, investment banks, endowments or hedge funds.
The second fund raised $10.2 million from 11 investors, including four institutional investors, one multi-strategy hedge fund, one family office and five individual investors, according to the university.
By definition, these investors expect a decent return.
So while the program may be managed by the Purdue Research Foundation, it’s not just the university and its affiliates “backing” the Boilermakers who sign the contracts.
“Little do you know you’re generating some massive return for hedge fund,” Kaufman said.
This is not how the students and families that spoke with IndyStar thought the program worked.
“It was about Purdue alumni investing in Purdue students,” said one parent, who spoke to IndyStar on condition of anonymity while their child is in negotiations over a Back a Boiler ISA.
The understanding, they said, was that Purdue alumni fronted the money for the program as a form of altruism, helping out the next generation of students. Those who made good money right out of school would pay back a little more than they borrowed, making up for those who made less and the proceeds would go back into the fund for the next round of students who needed a leg up affording a Purdue education.
To find out that wasn’t what was happening?
“My liking of Purdue has gone down big notches,” said the parent, who had previously received a master’s degree from the university.
Like other families, they say they feel duped by the marketing pitch. They made spreadsheets and did the math on the program and thought it was a good deal. Now, though, the family is looking at paying back the full 250% max cap because their child got a good-paying engineering job right out of school.
“Who would choose a 20% interest rate?” he asked.
With the typical terms of a 10-year agreement with a 250% max cap, it works out to a roughly 22% interest rate – higher than the average credit card interest rate – for those families who end up hitting the max cap.
Of course, for someone who comes out of school making less money and makes their full schedule of monthly payments without hitting the max cap, the rate would be much lower.
Savannah Williams isn't sure how much she'll end up paying back on her Back a Boiler contract.But, she knows when she'll be finished paying it off and that, Williams said, is givingher great peace of mind. It's why she signed up for the program.
An elementary school teacher, Williams said she didn't expect to come out of a school with a high-paying job so havingpayments tied to her income has been a relief. She also has private student loans that she says will take longer than 10 years to pay off.
"It's a good fit for me," she said. "After 10 years, I don’thave to pay anything, even if I don’t pay it in full. It’s relieving."
Williams was one of a handful of students featured in Purdue's early marketing of the program. She told IndyStar she's still happy with her decision.
Graduates say they signed 'too quickly'
It's hard to tell how many students would actually end up paying less than they borrowed.Data on the Back a Boiler website shows that the average salary in 2017 for an adult between the ages of 25 and 34 with a bachelor’s degree was nearly $60,000. When the university conducted its annual survey of recent graduates last year, the average reported annual salary was $62,452.
Alex, a Purdue graduate with a Back a Boiler contract who asked to only be identified by his first name for fear he could lose out on an opportunity for relief, called the program a “rip off.”
A few years removed, Alex wishes he’d taken out of a private student loan. He’d have been able to pay it off faster, for less money. But he says he bought into the marketing that made it sound like a better deal.
“I think that Purdue and Mitch Daniels putting their name on something like this makes it seem like more intrinsically valuable or truthful than what it really is,” he said. “But you end up paying a lot more money than what you should be.”
Alex said he tried more than a year ago to pay off the ISA early, without having to the pay the max cap amount that was more than double what he initially borrowed. He was told he could make his 100 monthly payments or pay the max cap in the contract.
That was the same response Florin Handelman received when he tried to find a way out of his ISA contract, just a few months after he signed it. The 2021 graduate said he didn’t fully understand what he was agreeing to when he signed a Back a Boiler contract for $10,000but quickly realized he’d made a mistake.
He reached out to the Purdue Research Foundation, which manages the program, to see if he could cancel the contract but was told it was too late. He’d already signed the contract and he’d have to live with the consequences of that for the next decade.
“Unfortunately, I made the decision way too quickly,” he said.
Handelman said he was disappointed with the response he received as a student and feels like he and other students were taken advantage of by a predatory program aggressively marketed to them. He said he was recruited to it by a mailer, placed in his on-campus dorm mailbox.
And it sounded like a great option, he said. Now, like Alex, he wishes he’d taken out a traditional private student loan instead. Similarly, he’s looked for a way to pay back the $10,000 he borrowed plus interest more in line with traditional loan rates. Handelman says an official with the program told him he needed to consider the investors that took on the risk of paying for his education.
“This was not created on the behalf of students to be able to choose an alternative to a student loan,” he said. “It’s a vehicle for investors to make a good amount of money. And I’m all for people making good returns, but not on the backs of college students.”
Call IndyStar education reporter Arika Herron at 317-201-5620 or email her at Arika.Herron@indystar.com. Follow her on Twitter: @ArikaHerron.
