Outcomes-Based Financing (OBF) for Students Act
- Sponsor
- Sen. Young, Todd [R-IN]
- Committees
- Finance Committee (primary)
- Last action
- Jun 24, 2026
Bottom line
This bill aims to legitimize and regulate outcomes-based student financing by providing tax clarity and robust consumer protections, fostering its growth as an alternative to traditional student loans.
What it actually does
This bill establishes a federal regulatory framework for "Outcomes-Based Financing (OBF) products," which include income share agreements and outcomes-based loans. It amends the Internal Revenue Code to clarify the tax treatment of OBF payments and discharges, mandates extensive consumer disclosures under the Truth in Lending Act (TILA), sets robust consumer protections like payment caps and income thresholds, and clarifies OBF product treatment under bankruptcy, credit reporting, and higher education laws.
Proponents argue
Supporters argue that OBF products offer a flexible, risk-sharing alternative to traditional student loans, aligning student and provider incentives with post-graduation success. By capping payments and linking them to income, OBFs protect students from unmanageable debt burdens, especially those in lower-earning careers, while encouraging innovation in workforce training and education.
Opponents contend
Critics might contend that OBF products, even with protections, can still lead to higher overall costs for successful students compared to traditional loans, effectively taxing future income. Concerns could also be raised about the complexity of income verification, potential for predatory practices despite regulations, and the broad preemption of state consumer protection laws.
The bill is moderately complex due to its technical amendments to multiple federal statutes, requiring careful reading to understand its full implications.
Sec. 101, Title I
Exclusion of Income from Discharge of Indebtedness
This provision amends the Internal Revenue Code to ensure that if an individual's payment obligation under an outcomes-based financing product is discharged or terminated (in whole or in part), the amount forgiven is not counted as taxable income. This aligns OBF products with certain student loan forgiveness programs for tax purposes, preventing a potential tax burden on individuals whose OBF obligations are reduced.
Supporters argue
Supporters argue this removes a significant tax barrier to OBF adoption, making the products more attractive and financially viable for students, especially those whose obligations are reduced due to low income.
Critics contend
No specific opposition to this tax treatment is typically raised, as it mirrors existing student loan forgiveness tax policy. However, broader critics of OBFs might see it as federal endorsement of a problematic financing model.
Tradeoffs
While beneficial for recipients, it represents a potential loss of federal tax revenue, balancing individual financial relief against government revenue.
Sec. 102, Title I
Treatment as Interest on Education Loan
This section amends the Internal Revenue Code to allow OBF recipients to deduct certain payments made under an outcomes-based payment agreement, treating them similarly to interest paid on a qualified education loan. The deductible amount is calculated as the excess of payments made during the taxable year over the amount of financing received in prior years, providing a tax benefit to OBF participants.
Sec. 201, Title II
Comprehensive OBF Disclosure Requirements
This section mandates the Bureau of Consumer Financial Protection (CFPB) to create specific regulations and model disclosure forms for OBF products under the Truth in Lending Act (TILA). It requires OBF providers to disclose key terms like "payment calculation method," "income threshold," and "completion mechanisms" more conspicuously, and provides detailed requirements for disclosures at application, approval, and consummation stages, including income scenarios and a warning about total payment commitment exceeding 20% of expected future income.
Sec. 301, Title III
Consumer Protections for OBF Products
This section introduces extensive consumer protections for OBF products under TILA. It defines key terms, prohibits acceleration of outcomes-based payment agreements, limits acceleration of outcomes-based loans, sets a maximum monthly payment obligation of 20% of income (inclusive of other OBFs), mandates a minimum income threshold (250% of poverty line) below which no payments are due, sets limits on OBF duration (240 monthly payments, 360 months total), and provides discharge protections for death or total disability. It also preempts certain state laws regarding OBF products.
Sec. 302, Title III
Dischargeability of OBF Products in Bankruptcy
This provision amends Title 11 of the U.S. Code to explicitly exclude OBF products from the category of debts that are generally non-dischargeable in bankruptcy. This means OBF obligations would be dischargeable in bankruptcy, similar to most other consumer debts, rather than being treated like federal student loans, providing a crucial financial safety net for recipients.
Sec. 403, Title IV
Allowing Outcomes-Based Underwriting
This section amends the Equal Credit Opportunity Act (ECOA) to explicitly permit OBF providers to use empirically derived credit systems that consider factors like historical graduation rates, debt-to-income ratios, and earnings of students from specific institutions or programs, or workers in specific fields, when making underwriting decisions for OBF products. This is allowed if the system is demonstrably and statistically sound, enabling OBF providers to assess future income potential.
Sec. 404, Title IV
Treatment under Fair Credit Reporting Act
This section amends the Fair Credit Reporting Act (FCRA) to allow consumer reporting agencies to include OBF product contract terms and amounts owed in consumer reports. However, it explicitly prohibits reporting any speculation about future amounts that may be owed under outcomes-based payment agreements, such as payment caps or early termination amounts. The CFPB is directed to issue regulations on how OBF information is furnished and reported.
This subsection broadly preempts various state laws and constitutional provisions that would otherwise apply to OBF products, including those related to insurance/wagering, assignment of future wages, equal/substantially equal payments, ability to repay, limits on financing amount/timing/length of term, prepayment, and usury limits. However, it includes exceptions allowing states to enact specific OBF legislation by referencing this federal section or if they had prior enacted "income share agreement" legislation consistent with certain federal limits.
Sec. 301(j), Title III
Why it matters:Preemption clauses are standard legislative practice when establishing a federal framework for an area previously regulated by states, but the breadth of preemption here is significant and could be controversial, potentially making it less prominent.
Case for: Proponents argue that federal preemption is necessary to create a uniform national market for OBF products, reducing regulatory fragmentation and uncertainty for providers, thereby encouraging innovation and investment in this financing model.
Case against: Critics, particularly states' rights advocates and some consumer groups, might argue that broad preemption undermines states' abilities to tailor consumer protections to local needs and could lead to a "race to the bottom" in regulatory standards, especially given the narrow exceptions.
Estimated impact: Shifts significant regulatory authority from state governments to the federal level for OBF products, potentially standardizing market practices but limiting state-specific consumer safeguards.
Amends the Higher Education Act's "90/10 rule" for proprietary institutions. Currently, these institutions cannot derive more than 90% of their revenue from federal student aid. This amendment specifies that for OBF products made by proprietary institutions, only the amount of OBF payments received during the applicable institutional fiscal year (up to the amount financed) counts towards the 10% non-federal revenue portion.
Sec. 402(1), Title IV
Why it matters:Amendments to existing complex regulatory calculations are often placed in technical sections. The 90/10 rule is a known area of contention for proprietary institutions, and changes to it can be politically sensitive.
Case for: Proprietary institutions and OBF providers might argue this clarifies how OBFs fit into the 90/10 rule, potentially making it easier for institutions to use OBFs without violating the rule, thus expanding financing options for students.
Case against: Critics of proprietary institutions might argue this amendment could create a loophole, allowing these institutions to count OBF payments (which are often facilitated by the institution itself or its affiliates) as non-federal revenue, potentially undermining the intent of the 90/10 rule to ensure institutions have a significant stake in student outcomes.
Estimated impact: Could significantly impact the financial models of proprietary institutions that utilize OBF products, potentially increasing their reliance on OBFs as a source of "non-federal" revenue.