Investing in Student Success Act of 2015

To provide the legal framework and income tax treatment necessary for the growth of innovative private financing options for students to fund postsecondary education, and for other purposes. 1. Short title and table of contents (a) Short title This Act may be cited as the Investing in Student Success Act of 2015 (b) Table of contents Sec. 1. Short title and table of contents. Title I—Tax treatment of income-share agreements Sec. 101. Definition of income-share agreement Sec. 102. Tax treatment of proceeds and payments of future income. Sec. 103. Terms and conditions of income-share agreement contracts. Sec. 104. Rulemaking; model disclosure forms. Title II—Treatment of income-share agreements under State law Sec. 201. Purpose; lawfulness of contracts; preemption of State law. Sec. 202. Preemption of State law with respect to usury. Sec. 203. Definitions. Title III—Qualified education loan Sec. 301. Qualified Education loan. Title IV—Federal individual assistance treatment of income-share agreements Sec. 401. Proceeds not treated as income in calculation of financial need under the higher education act of 1965. Title V—Investment company treatment Sec. 501. Businesses making income-share agreements excluded from investment company treatment. I Tax treatment of income-share agreements 101. Definition of income-Share agreement For purposes of this title, the term income-share agreement 20 U.S.C. 1087ll 102. Tax treatment of proceeds and payments of future income (a) Exclusion from gross income of Income-Share agreement proceeds Payments made under an income-share agreement that complies with the requirements of section 103 to or on behalf of the individual who commits to pay a specified percentage of such individual’s future income to another person under such agreement, and any difference in value of the payments to or on behalf of such individual and the total amount paid by such individual, shall not be includible in the gross income of such individual for purposes of the Internal Revenue Code of 1986. (b) Treatment of payments of future income Payments of future income received by another person under an income-share agreement that complies with the requirements of section 103 shall be treated for purposes of the Internal Revenue Code of 1986— (1) first, with respect to so much of such payments as does not exceed the amount of the payments to which subsection (a) applies with respect to such agreement, as a repayment of investment in the contract which reduces the holder’s basis in such agreement, and (2) second, as income on the contract which is includible in gross income. 103. Terms and conditions of income-share agreement contracts (a) Terms and conditions An income-share agreement complies with the requirements of this section only if the contract complies with each of the following conditions: (1) Specified percentage of income The income-share agreement shall specify the percentage of future income that the individual subject to the agreement will be obligated to pay, except that the agreement shall provide that for any year covered by such agreement during which the individual has an income that is less than $18,000 (as such amount is adjusted pursuant to paragraph (8)) the individual shall not be required to pay for such year any portion of the individual’s income. (2) Definition of income The income-share agreement shall specify the definition of income to be used for purposes of calculating an individual’s obligation to pay under the agreement. (3) Annual limitation on obligation The percentage of income required under the income-share agreement to be paid by the individual subject to the agreement may not exceed a percentage such that, when multiplied by $15,000 (as such amount is adjusted pursuant to paragraph (8)), the product exceeds the aggregate amount of periodic payments of principal and interest that would be required to be paid during a 12-month period under a comparable loan that bears interest at a fixed annual rate of 20 percent. (4) Aggregate limitation on obligation The income-share agreement may not provide for the individual subject to the agreement to pay under the agreement an amount of the future income of such individual that, when added to any other amounts of future income that such individual has agreed to pay under any other income-share agreements to which such individual is subject, equals a sum that at any time exceeds 15 percent of the future income of such individual. (5) Time-based limitation on obligation (A) Limitation The income-share agreement may not provide for the individual subject to the agreement to assume a commitment to pay future income having a commitment factor, that when added to the commitment factors for any other income-share agreements to which such individual is subject, equals a sum that exceeds the maximum commitment factor. (B) Commitment factor As used in this paragraph, the term commitment factor (i) the percentage (expressed as a decimal) of such future income required to be paid during such period; and (ii) the remaining number of years under the agreement that future income is required to be paid at such percentage. (C) Maximum commitment factor As used in this paragraph, the term maximum commitment factor (6) Specified duration; extension of period (A) Duration The income-share agreement shall specify the maximum period of time during which the individual will be obligated to pay a portion of the individual’s future income which may not, except as provided in subparagraph (B), exceed 360 months. (B) Extension of period The income-share agreement may provide that such period may be extended by a number of years that is equal to the number of years during which the agreement is in force for which the individual’s annual income is below the dollar amount specified in paragraph (3)(A) (as such amount is adjusted pursuant to paragraph (8)). (7) Early termination The income-share agreement shall specify the terms and conditions by which the individual subject to the agreement may extinguish the individual’s obligations under the agreement before the end of the payment period specified in the agreement and any application extension provided for in the agreement pursuant to paragraph (6)(B). (8) Adjustment for inflation A dollar amount adjusted in accordance with this paragraph shall be adjusted each year to reflect changes in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the Department of Labor for the most recent 12-month period for which such data are available. (b) Required disclosures An income-share agreement does not comply with the requirements of this section unless the individual who is committing under the agreement to pay future income is provided, before entering into such agreement, a written document that clearly and simply discloses— (1) that the agreement is not a debt instrument, and that the amount the individual will be required to pay under the agreement— (A) may be more or less than the amount provided to the individual pursuant to the agreement; and (B) will vary in proportion to the individual’s future income; (2) that the obligations of the individual under the agreement are not dischargeable under bankruptcy law, except in a case that would impose an undue hardship on the debtor and the debtor’s dependents; (3) whether the obligations of the individual under the agreement may be extinguished by accelerating payments, and, if so, under what terms; (4) the duration of the individual’s obligations under the agreement (absent such accelerating payments), including any circumstances under which the duration of the agreement would be extended; (5) the percentage of income the individual is committing to pay under the agreement and the minimum amount of annual income that, pursuant to subsection (b)(1), triggers the individual’s obligation under the agreement to make payments for such year; (6) the definition of income to be used for purposes of calculating the individual’s obligation under the agreement; and (7) a comparison of— (A) the amounts an individual would be required to pay under the income-share agreement at a range of annual income levels, which income levels shall correspond to the levels the individual might reasonably be expected to make given the intended use of the funds provided under the agreement, as determined in accordance with guidance issued by the Secretary of the Treasury; to (B) the amounts required to be paid under a comparable loan that bears interest at a fixed annual rate of 10 percent. (c) Non-Interference An income-share agreement represents an obligation by the individual pay the specific percentage of future income, but shall not be construed to give the contract holder any rights over an individual’s actions. (d) Comparable loan For purposes of this section, the term comparable loan (1) has the same original principal amount as the total amount of the payment or payments made under the income-share agreement to or on behalf the individual subject to the agreement; (2) has the same term to maturity as the duration of the income-share agreement; and (3) is fully amortized over such term with monthly payments of principal and interest. 104. Rulemaking; model disclosure forms (a) In general The Secretary of the Treasury, in consultation with such other agency heads as the Secretary considers appropriate, may issue such regulations as may be necessary to carry out this title. (b) Model disclosure forms (1) In general Not later than the end of the 180-day period beginning upon the date of the enactment of this Act, the Secretary of the Treasury, after consultation with such other agency heads as the Secretary considers appropriate, shall promulgate a model disclosure form for the disclosures required under section 103(b). (2) Safe harbor Any person who uses the model disclosure form promulgated pursuant to paragraph (1) and includes accurate information required under section 103(b) to be disclosed shall be deemed to have satisfied the requirements of section 103(b). II Treatment of income-share agreements under State law 201. Purpose; lawfulness of contracts; preemption of State law (a) Purpose It is the purpose of this title to authorize individuals to enter into income-share agreements for the purposes of obtaining funds for postsecondary education in exchange for agreeing to pay to the holder of the contract a specified percentage of the individual's future income for a specified period of time. (b) Lawfulness of contracts; preemption of State law Any income-share agreement that complies with the requirements of section 103 shall be a valid, binding, and enforceable contract notwithstanding any State law limiting or otherwise regulating assignments of future wages or other income. 202. Preemption of State law with respect to usury An income-share agreement that complies with the requirements of section 103 shall not be subject to State usury laws. 203. Definitions As used in this title: (1) State The term State (2) State law The term State law III Qualified education loan 301. Qualified Education loan (a) In general Paragraph (1) of section 221(d) Such term includes any income-share agreement (as such term is defined in section 101 of the Investing in Student Success Act of 2015 (b) Information Reporting Not Required Subsection (e) of section 6050S of such Code is amended by inserting (without regard to the last sentence thereof) section 221(d)(1) IV Federal individual assistance treatment of income-share agreements 401. Proceeds not treated as income in calculation of financial need under the higher education act of 1965 No portion of any amounts received by an individual for entering into an income-share agreement (as such term is defined in section 101 of this Act) that complies with the requirements of section 103 of this Act shall be included as income or assets in the computation of expected family contribution for any program funded in whole or in part under the Higher Education Act of 1965 ( 20 U.S.C. 1001 et seq. V Investment company treatment 501. Businesses making income-share agreements excluded from investment company treatment Section 3(c) of the Investment Company Act of 1940 ( 15 U.S.C. 80a–3(c) (1) in paragraph (4), by inserting after industrial banking, income-share agreements (as such term is defined in section 101 of the Investing in Student Success Act of 2015 (2) in paragraph (5), by inserting , including income-share agreements services

Summary: Investing in Student Success Act of 2015 This bill authorizes an individual (i.e., a student) and another person (i.e., an investor) to enter an income-share agreement (ISA) in which the student agrees to pay a percentage of future income, for a specified period of time, in exchange for funds to pay for postsecondary educational expenses. An ISA that complies with specified terms and conditions and meets certain disclosure requirements is a valid, binding, and enforceable contract and is not subject to state laws that limit interest rates or regulate assignments of future income. The bill amends the Internal Revenue Code to include an ISA as a qualified education loan (a qualified education loan is not dischargeable in bankruptcy), but it prohibits a tax deduction for interest paid on an ISA (interest paid on a qualified education loan is tax deductible). Payments to a student under an ISA are not includible as: (1) gross income for tax purposes, or (2) income or assets for federal financial aid eligibility purposes under the Higher Education Act of 1965. The bill amends the Investment Company Act of 1940 to exclude as an investment company any person whose business substantially consists of making ISAs.