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In this entry of our “Innovations in Higher Education Financing” series, we take a closer look at a “new” proposal to reimagine the process of paying for college: Income Share Agreements.
ISAs aren’t really a new concept; economist Milton Friedman first came up with the idea of students promising to pay back a portion of their future income, in exchange for upfront higher education funding, back in the 1950s. In the ‘70s, Yale University experimented with an ISA program that largely failed because financially successful graduates complained they were subsidizing their less successful classmates.
ISAs have stuck around through the years but on a very limited scale. But amid concerns over student debt and the value of a college education, they could be poised to take a more prominent position in the patchwork of student aid.
The ISA concept is starting to make a comeback in student aid policy discussions, most notably when the respected and well-known Purdue University announced the creation of its “Back a Boiler” program in 2016. But the Purdue program is not your father’s ISA.
Traditionally, ISA models involved private investors fronting the funds to students, who in turn would agree to pay the investor a certain percentage of their salary for a certain number of years. Some models incorporated a peer to peer aspect, whereby the alumni of a particular institution invested in the institution’s current students.
Proponents say ISAs help alleviate the risk to the student that the education paid for won’t provide the promised outcome. Students are insulated against problems paying back the debt because monthly payments, much like with income driven repayment for federal student loans, rise and fall with earnings, with no payment due during periods of unemployment.
Detractors argue the agreements are tantamount to indentured servitude; that students who go on to be very financially successful could end up repaying an amount well above the original amount provided; and that ISAs promote inequality because investors are more likely to favor safe bets (such as, say, the white male engineering student) over minority or low-income students studying fields that lead to lower pay.
To its credit, Back a Boiler seeks to right some of the wrongs of past ISA models. “Up to this point, ISAs have been backwardly construed,” explains Michael Stynes, executive director of the Jain Family Institute, the think tank that worked with Purdue to design its ISA program. “In contrast, student interests drove the design of Purdue’s program”
According to Stynes, the capital for Back-A-Boiler comes from both Purdue’s endowment and outside investors. Further, the funds are pooled together such that the Purdue Research Foundation (and/or a vendor acting on its behalf) handles all approvals and distribution; no private investor gets a say in which students receive an ISA.
In this first phase, 160 Purdue students entered into ISAs in the fall of 2016. Participants were restricted to juniors and seniors. The program is open to students studying a variety of majors, but loan terms vary by class year and major.
Unlike a traditional loan, there’s no interest added to an ISA. But Purdue is very upfront about how much students will pay over the life of their agreements. Their website states: “Most individuals in the program will pay more than the principal borrowed. The amount you are required to pay (Income Share multiplied by earned income) will only grow due to the growth rate of the amount of the income your earn, but the income share level percentage will not change over the course of the ISA.” The program does cap the total amount paid at 2.5 times the amount received.
While the amount of the original borrowed principal that’s ultimately paid back will vary by each student, depending on their level of financial success post-graduation, Purdue’s goal was to equalize the cost of capital for each student.
“If our predictions of salary are correct, all ISA recipients will be paying the same cost for capital,” explains Stynes.
The hope is that the ISA structure will give little opportunity for students to fall behind on payment, but rules have of course been put in place to deal with that eventuality. Under the Purdue model, ISA recipients default under two scenarios: if they don’t pay for 70 days; or if they fail to report their income for one year. Unlike conventional student loans, ISAs are dischargeable in bankruptcy.
“Repayment terms are designed to be as generous and flexible as possible, but still ensure people don’t take advantage,” says Stynes.
The ability for a bankruptcy discharge is a decided advantage, ISA proponents say, over private loans, which is the main competitive marketplace for ISAs. Supporters of ISAs are the first to admit they’re no silver bullet solution or wholescale substitute for all student loans. Instead, ISAs as currently construed are seen as primarily an alternative to private student loans originated by lenders – not a replacement for direct loans from the federal government.
For their part, higher education institutions have been showing increased interest in incorporating ISAs into their financial aid offerings. Faced with negative public perceptions of student debt and declining faith in return on investment in higher education, schools are eager to show their value and prove they have skin in the game when it comes to insuring good outcomes for their students.
“Since the Higher Education Act of 1965, the three financial aid tools we’ve been using – grants, loans, work-study – have essentially stayed the same,” says Bill Brosseau, vice president and co-founder of Vemo Education, the company that was hired by the Purdue Research Foundation to design, deploy, and service the Back a Boiler program. Vemo is staffed with industry experts in education policy, analytics, servicing and compliance. Vemo offers a soup-to-nuts ISA service to schools for everything from finding investors to a platform for originating and servicing the individual agreements. “Schools are desperate for something new. Whereas traditional financial aid looks at the past, like how much a student and/or her family earned in income over the past year, ISAs allow schools to validate their value in the future.”
Vemo reports a growing number of schools inquiring about ISAs since the Back a Boiler announcement last year. “For schools, ISAs can represent a new enrollment and retention tool,” says Kerry Schneider, Vemo’s chief of staff.
And it’s not just traditional colleges and universities who are testing out ISAs. They’re also becoming prominent among coding academies, many of which aren’t eligible to offer federal financial aid at this time, and new education alternatives like the recently formed MissionU. Just like traditional institutions, these alternative education providers see their success wrapped up in their students. “As Learners Guild recently told us, ‘We’re never in a position to win if our students lose,’” relates Brosseau.
Jain Family Institute is ready to take its ISA work to the next level. “We’re going to make the progressive cases for ISAs and show it’s a viable, scalable solution to help low-to-medium-income students access college,” says Stynes.
Vemo and the Purdue Research Foundation, meanwhile, recently announced an initiative to assist interested institutions with best practices and technical support to establish ISA models on their respective campuses. They admit they have their work cut out for them (“We need to educate and counteract the negative stereotype of indentured servitude,” says Brosseau) because uncertainty over ISAs abounds not just in policy circles but also among students and parents themselves, as evidenced by focus groups conducted by the New America Foundation and the American Institutes for Research.
Time will tell how well ISAs fare. For now, they have their fans and critics alike. But ultimately, it’s important to remember that ISAs aren’t meant to be a silver bullet. They’re just one of the many tools we must wield in the fight to create greater college access, affordability, economic mobility and income equality. And with student debt spiraling ever-upward, perhaps we need all the weapons we can get.