A few years ago, Faith Chikwekwe came across an article on Reddit about a program that she believes would help her fulfill her dream of turning her passion for coding into a career.
Chikwekwe appreciated that the organization, Make School, appears to offer the faster pace of a coding bootcamp with elements of a more traditional curriculum. When she took to her website to find out more, Chikwekwe enjoyed seeing pictures of black women like her. But one feature that really sold her to the program: the ability to attend without paying any money up front.
“For someone who was in my situation, that was it”, Chikwekwe spoke about Make School’s funding option, known as the Revenue Sharing Agreement, an agreement where, instead of paying tuition fees before enrolling, students agree to pledge a portion of their earnings. future after finding a job.
At the time, Chikwekwe couldn’t afford to spend tens of thousands of dollars in tuition on her salary as a telephone saleswoman, so she signed three revenue sharing agreements. But a few months after entering Make School, Chikwekwe began to be suspicious of deals, which would have required her to shell out over 25% of her pre-tax income for about three years and 7.5% of her income for another three. years. after getting a job after graduation.
“It’s the type of money that changes your ability to live and your ability to live with dignity,” Chikwekwe said. She was quick to drop out of school within a year of enrolling, so she wouldn’t have to shoulder more funding.
Today, 29-year-old Chikwekwe is one of 47 former students claiming to have been misled about the cost of the agreements. They filed a lawsuit last week against Vemo, the company that manages Make School’s revenue sharing agreements, and Make School Inc., the company that until recently operated Make School and is in the process of winding up (Make School is now operated by a non-profit organization).
Are revenue sharing agreements loans?
The lawsuit comes as revenue-sharing deals receive increased attention from supporters and detractors. For investors, philanthropists and the schools offering them, ISAs are an innovative product that could help tackle the student debt crisis by allowing students to finance their studies in a way that protects them against low income or loss. Job Loss. This is because students only make payments if their graduate income is above a certain threshold.
ISA supporters have called for clearer regulations around agreements as a way to protect students.
But for consumer advocates, the deals are loans under a different name. They say the push for regulation is actually a way to exclude ISAs from lending laws protecting borrowers from discrimination. They are also concerned about how some coding programs that are not eligible for federal student loans are using ISAs to attract low-income students.
“What we’ve seen time and time again is companies – whether on the education side or the financial side – talking about disruption, technological advancements or promises of a brighter future, but what shows this lawsuit, far too often it’s empty promises and mounds of debt, ”said Seth Frotman, executive director of the Student Borrower Protection Center, a borrower advocacy group supporting the lawsuit.
The lawsuit alleges that both companies enrolled students in ISAs during a period when Make School did not have the required approval from the California Office of Private Post-Secondary Education to operate. ISAs issued during this period – between 2016 and 2018 – are therefore inapplicable, according to the lawsuit.
Additionally, the lawsuit claims that Make School and Vemo misled students about the true cost of ISAs. Make School told students they can expect to pay around $ 100,000 for a full bachelor’s degree if they fund their studies, according to the lawsuit. In reality, the deals could cost as much as $ 250,000, according to the lawsuit.
Revenue sharing agreements are reimbursed in two ways. Either the student devotes part of their income to the obligation for a certain number of months, or they reach the ISA payment ceiling.
In Make School’s case, payment caps were between two and a half and three times the amount of funding provided, according to the lawsuit. Additionally, funding the tuition and living expenses for the typical two-year duration of the program required several sequenced revenue sharing agreements, essentially extending the payback period of the funding agreement, the lawsuit says.
“ISAs have solved an unresolved problem in higher education: How can students who do not qualify for student loans finance their university studies? ”
The lawsuit alleges that many students were not told they would need multiple agreements until after they had already signed up for the first ISA and had a vested interest in completing the program. Melody Sequoia, the lawyer representing the students, called the practice “blatant”.
But the claims also reflect one of the concerns of consumer advocates about ISAs more generally – that students may find it difficult to understand their terms and true costs.
“ISAs have been touted as new and innovative, but they really aren’t,” Sequoia said, noting that the federal student loans program allows borrowers pay off their debt as a percentage of their income. “It’s a loan, even though they say it’s not. The reason this is a loan is that the student does not pay upfront and agrees to pay more at a later date.
Vemo declined to comment on the ongoing litigation, but said in a statement the company supports the creation of a “legal framework to establish safeguards” on ISAs. “We are committed to ensuring that all students have the most transparent and reliable information on how to finance their post-secondary education path,” the statement said.
Supporters present revenue sharing deals 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 has been published and disclosed in writing for half a decade. Make School wasn’t trying to get rich, he said – the ISA program hasn’t made a profit since 2014, according to Rossmann.
But the 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: don’t pay nothing if you earn less than $ 60,000 / year. ,” he wrote.
“It is devastating to see a group of alumni, on average richer than the teachers and staff who trained them, falsely claim that Make School has unfairly enriched itself with an ISA program that only existed for offer upward mobility possibilities to students, whatever their financial situation. background, ”Rossmann added.
In recent years, ISA supporters have presented the agreements as an alternative to debt that better align incentives between students and their schools. The idea is that the more successful a student, the more money a school earns on the business.
The complaint claims that staff told students that the company had used ISAs to receive funds from investors, allegedly telling them in a message from May Slack that “[t]The ISA program relied heavily on investors buying the future repayment of these loans in exchange for lending 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 with dignity.”
Rossmann has denied selling the ISA contracts to investors. “We are aware 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 ISA and its bachelor’s program is now run by a non-profit organization. The ISA contracts are now held by a company in liquidation, according to the lawsuit.
“ISAs have solved an unresolved problem in higher education: How can students who do not qualify for student loans finance their college education? Rossmann said. “We mourn the students who lost access to the funding they needed to achieve their dreams as a result of this lawsuit.”
“Trying to recover some of the financial time that I lost”
Chikwekwe, who also has around $ 40,000 in traditional student loans, said she never thought she would have something nice to say about this type of debt. But after her experience with the revenue-sharing agreement, Chikwekwe said she appreciated the flexibility of the student loan program.
With the ISA, Chikwekwe felt like he had fewer options. For example, unlike a student loan, an ISA’s income share does not adjust when family size changes, according to the lawsuit.
“Unless I lose my job or decide to take a job that pays me very low wages, there’s no real way to take a break from paying,” Chikwekwe said of the job. ‘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 generational wealth – to “start to be more of a resource than a burden for her. my family “as she put it.
Although she landed a job as a software engineer, the ISA combined with the Bay Area rent absorbed Chikwekwe’s income so much that she couldn’t afford to save. She returned home to Georgia. “I’m here with my family to try to recoup some of the financial time I wasted paying the ISA,” she said.