The Student Borrower Protection Center and the National Consumer Law Center on Monday filed an official complaint with the Federal Trade Commission, calling on the agency to investigate Vemo’s business practices. The groups say Vemo engages in deceptive marketing that could result in college students paying thousands of dollars in unexpected costs, and they are asking the FTC to order restitution for borrowers harmed by these alleged practices.
Vemo brokers contracts for income-share agreements, commonly called ISAs, which have been hailed as an alternative to private student loans and federal Parent Plus loans. But a platform Vemo created to compare the options relies on false assumptions, according to the complaint.
Consumer groups claim the comparison tools use misleading information about the repayment terms for Parent Plus loans, inflating the cost of borrowing and making ISAs look more attractive. They also say Vemo uses outdated, low starting salaries of graduates at the colleges offering ISAs, making ISAs appear cheaper to repay to understate costs. And Vemo also fudges the calculation of a student’s estimated income growth over the repayment term, making its agreements appear less expensive than traditional loans, according to the complaint.
“What you have here is really straightforward,” said Seth Frotman, executive director of the Student Borrower Protection Center, pointing to what he called “irrefutable evidence” that one of the largest income-share providers “is just openly lying to consumers.”
“It’s hard to argue these are simple mistakes when there are so many of them,” he said.
The FTC declined to comment.
In a statement, Vemo co-founder Jeff Weinstein said the complaint appears to be based on an older version of its comparison tools. He said the company is updating the platform to incorporate real-time data and provide clarity and transparency to students and institutions. Vemo, he said, has made some choices that actually understate the benefits of income shares compared with loans, such as using a 10-year repayment term to compare the two when it typically takes twice as long to pay off a student loan.
“ISAs are, in many respects, fundamentally different from loans, so comparing the two is not always straightforward,” Weinstein said. “We work continuously to improve our Comparison Tool to ensure that it is as clear and accurate as possible.”
The Reston, Va.-based company said that the projected earnings data it uses comes directly from schools and that income growth is based largely on Census Bureau and Education Department data.
The consumer advocacy groups say the older version of Vemo’s comparison tool is what is publicly available and what borrowers are using to make financial decisions. “The consumer protection issues nonetheless persist,” said Joanna Darcus, an attorney at the National Consumer Law Center. “Some ISA borrowers will repay more than the comparison tool led them to believe they would owe. Prospective borrowers should be spared that experience and expense.”
The complaint draws attention to the largely unregulated market for income-share agreements. Since the agreements are not exactly loans, there are questions about whether they are subject to state usury statutes or federal laws such as the Fair Credit Reporting Act. Nevertheless, consumer advocates say there are clear rules of conduct that all types of companies must adhere to.
“We have a robust consumer protection framework, a body of law that helps us figure out what rights consumers have when they interact with businesses and protect them if things go wrong,” Darcus said. “All we are doing is asking Vemo and other ISA providers to play by the same rules as every other business.”
Members of Congress have introduced legislation over the years to protect students and investors. All of the bills would have capped the maximum amount a student must repay and prevented funders from demanding payment when the borrower is making poverty-level wages. All of them stalled in committee.
Proponents of income shares say the lack of a legal framework has stunted the growth of the market. A few small companies and nonprofits have piloted programs or offered contracts, with the model gaining the most traction with short-term training programs. Purdue University generated a lot of buzz with the 2016 rollout of its income-share program, but other traditional schools have been reluctant.
Still, the novel lending model is gaining momentum. Whereas one college offered income shares four years ago, there were about 76 with programs in 2019, according to Vemo.
Income shares resemble traditional loans in that students are obligated to repay at least a portion of the money they receive. But unlike with a student loan, no interest accrues and the obligation ends after a set time.
Critics of the model say it can become an expensive way to finance education if the borrower has high earnings. Some worry that graduates with profitable degrees in engineering, for instance, can get better repayment terms than those studying to become teachers. And that pricing differential, they say, could reinforce existing inequalities and create a disparate impact among borrowers.