These students thought they were paying for their education with an innovative alternative to loans — but the true cost was hidden, lawsuit alleges

A few years ago, Faith Chikwekwe came across a post on Reddit about a program she thought would help her achieve her dream of turning her passion for programming into a job.

Chikwekwe liked that the Make School organization seemed to offer the faster pace of a coding boot camp with elements of a more traditional degree. When she visited the website to learn more, Chikwekwe was delighted to see photos of black women like her. But one feature that really won them over to the program: the ability to participate without paying any money upfront.

“For someone who was in my situation, it was all” Chikwekwe said of Make School’s funding option known as the Income-Sharing Agreement, an arrangement under which students, instead of paying tuition fees prior to enrollment, pledge a portion of their future income after they find a job.

At the time, Chikwekwe couldn’t afford to spend tens of thousands of dollars on tuition on her telemarketing salary, so she signed three income-sharing agreements. But a few months after her time at Make School, Chikwekwe began to be suspicious of the agreements that would have required her to split over 25% of her pre-tax income for about three years and 7.5% of her income for another three years for a job after graduation.

“It’s the kind of money that changes your ability to live and your ability to live with dignity,” Chikwekwe said. She hurried to drop out of school within a year of enrollment so that she would not have to take on further funding.

Now Chikwekwe, 29, is one of 47 former students who claim they were misled about the cost of the agreements. They filed a lawsuit last week against Vemo, the company that operates Make School’s income-sharing arrangements, and Make School Inc., the company that until recently operated Make School and is in the process of being wound up (Make School is now owned by a nonprofit Organization operated). Organization).

Are income-sharing agreements loans?

The lawsuit comes as income-sharing agreements receive increasing scrutiny from both supporters and critics. For investors, philanthropists, and the schools that offer them, ISAs are an innovative product that could help manage the student debt crisis by allowing students to finance their education so that they can face low income or job loss protects. Because students only make payments if their postgraduate income is above a certain limit.

Proponents of the ISAs have called for a clearer regulation of the agreements to protect students.

But for consumer advocates, the contracts are loans under a different name. They say that pushing for regulation is actually a way to cut ISAs out of lending laws that protect borrowers from discrimination. They also worry about the way some programming programs that are not eligible for government student loans are using ISAs to attract low-income students.

“What we have seen over and over again is that companies – whether on the education or finance side – talk about disruption, technological progress or promises of a better future, but this lawsuit shows far too often that these are empty promises and mountains of debt” said Seth Frotman, the executive director of the Student Borrower Protection Center, a borrower advocacy group that supports the lawsuit.

The lawsuit alleges that the two companies enrolled students for ISAs during a period when Make School did not have the required approval from the California Bureau of Private Postsecondary Education to operate. The ISAs issued during this period – between 2016 and 2018 – are therefore unenforceable, according to the lawsuit.

In addition, the lawsuit alleges that Make School and Vemo misled students about the real cost of the ISAs. Make School told students that if they funded their education, they could pay about $ 100,000 for a full bachelor’s degree, according to the lawsuit. In reality, the deals could cost up to $ 250,000, the lawsuit said.

Income share agreements are repaid in two ways. Either the student pays a portion of their income towards the commitment for a certain number of months, or they reach the ISA’s payment cap.

In the case of Make School, the disbursement caps were between two and a half and three times the funds provided, according to the lawsuit. In addition, funding tuition and living expenses for the typical two-year duration of the program required multiple sequential income-sharing agreements that essentially extend the payback period of the financing business, the lawsuit said.

“ISAs have solved an unsolved problem in higher education – how can students who do not qualify for a student loan fund their higher education?”

– Jeremy Rossmann, one of the founders of Make School

The lawsuit alleges that many students were first told that they would need multiple agreements before they had already signed up for the first ISA and had a legitimate interest in completing the program. Melody Sequoia, the student lawyer, described the practice as “monstrous”.

But the allegations also reflect one of the concerns expressed by consumer advocates about ISAs in general – that students may struggle to understand their terms and true costs.

“ISAs have been presented as new and novel and innovative, but they really aren’t,” Sequoia said, noting that the government student loan program allows borrowers to repay their debts as a percentage of their income. “It’s a loan, even if they say it isn’t. The reason it is a loan is because the student does not pay upfront and instead agrees to pay more at a later date. “

Vemo declined to comment on the pending litigation, but said in a statement that the company supported the creation of a “legal framework to establish guard rails” for ISAs. “We are committed to ensuring that all students have the most transparent and reliable information on how to finance their post-secondary education,” the statement said.

Proponents suggest income-sharing arrangements as an alternative to debt

Jeremy Rossmann, one of the founders of Make School, wrote in an email that the full ISA cost was published and disclosed in writing for half a decade. Make School didn’t try to enrich itself, he said – the ISA program hasn’t made a profit since 2014, according to Rossmann.

But the payments for ISAs are “high for high-wage students,” he said, “because it is expensive to lend to low-income students, and our ISAs have an integrated insurance policy: pay nothing for less earning than $ 60,000 a year, “he wrote.

“It is devastating to see a group of alumni, on average wealthier than the faculty and staff who trained them, falsely claim that Make School wrongly enriched us through an ISA program that only existed to enable students to move up regardless of their financial background, ”added Rossmann.

In recent years, ISA advocates have touted 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 will make from the business.

The complaint alleges that staff informed students that the company used the ISAs to raise funds from investors and allegedly told them in a May Slack message that “[t]The ISA program relied heavily on investors buying the future repayment of these loans to borrow Make School the money it needed to operate. “

“It’s the kind of money that changes your ability to live and your ability to live with dignity.”

– Faith Chikwekwe, one of dozens of students who say they were misled about the real cost of income-sharing agreements

Rossmann denied selling the ISA contracts to investors. “We understand that many schools have sold their contracts and we are proud that we never did,” he wrote in the email to MarketWatch.

Make School no longer offers ISAs and its undergraduate program is now run by a non-profit organization. According to the lawsuit, the ISA contracts are now held by a company that is in liquidation.

“ISAs have solved an unsolved problem in higher education – how can students who do not qualify for a student loan fund their higher education?” Said Rossmann. “We mourn the loss of the students who, as a result of this lawsuit, lost access to the resources they needed to make their dreams come true.”

“I’m trying to regain some of the financial time I’ve lost”

Chikwekwe, who also has $ 40,000 in traditional student loans, said she never thought she had anything good to say about this type of debt. But after her experience with the income-sharing arrangement, Chikwekwe said she appreciated the flexibility of the student loan program.

At ISA, Chikwekwe, she felt she had fewer options. For example, unlike a student loan, the income portion of an ISA does not adjust if the family size changes according to the lawsuit.

“Unless I lose my job or decide to take a job that brings me a very low salary, there is no real way to take a break from payments,” Chikwekwe said of the ISA.

When Chikwekwe initially enrolled in Make School, she hoped it would lead her to a job that could help her save for retirement and build some generational wealth – to be “a resource rather than a liability to my family “How they put it.

Despite getting a job as a software engineer, the ISA, combined with renting in the Bay Area, devoured 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 just to try to regain some of the financial time I lost paying the ISA,” she said.