December 12, 2017

Income Share Agreements… Investing in the Future, Sharing in the Risk

By Ashley Smith, Contributor, RTWBC

When it comes to student loans, Americans are facing a crisis of epic proportions. It is even worse than most people think. According to Forbes, the amount of outstanding federal student loan debt reached $1.31 trillion in 2017. Student loan debt is now the second highest consumer debt category, 

behind only mortgage debt, higher than both credit cards and auto loans. The Federal Reserve reports there are 44.2 million borrowers with student loan debt and the default rate is 11.2%. These statistics are alarming. Even more troubling is that an American Enterprise Institute study (1) found only 7 percent of students and 5 percent of parents had even heard of an Income Share Agreement (ISA).

Clearly, something’s got to give.

Could crippling student loan debt, rising tuition costs and the (increasingly ambiguous/questionable) necessity of a postsecondary degree ignite a national reform of financial aid? Is it possible that ISAs can be a solution?

History of Income Share Agreements

Income share agreements, while advocated by some as a new solution to the student loan crisis, are not a novel idea. In 1955, economist Milton Friedman introduced the concept in the Role of Government in Education (2): “Investors could ‘buy’ a share in an individuals earning prospects by advancing them funds to finance their education on the condition that the student agree to pay the lender a specified fraction of future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his original investment from the unsuccessful.” Current ISAs operate between an individual and the investor or organization.

ISAs in Action

As a solution to the skills gap in Information Technology, venture capital firms began opening coding boot camps, charging no tuition upfront, but asking for a percentage of student’s future income once they secure employment. Some post-secondary institutions have followed suit.

Purdue’s Back-A-Boiler Success

Purdue University has brought ISAs into the public eye through their Back-A-Boiler effort. The ISA program is entering its third year. According to PBS Newshour (2), President of Purdue University Mitch Daniels says the new funding model is seen as an investment, much like one in the stock market. In this case, the initial investor was Purdue’s Research Foundation which funded the first $5 million and all 160 students who applied. Purdue takes a personalized approach by establishing the terms of the agreement well before each student launches a career. According to Inside Higher Ed (3), the proportion and terms vary based on the student’s major. The amount they have to repay is capped at 2.5 times the original amount received. The average student can expect to repay 1.67 times the amount of the original ISA. Students who earn less than $20,000 are not expected to repay anything. Purdue has now created a separate philanthropic program where alumni and others can donate to Back-a-Boiler.

Vemo Is Betting on the Future

Tonio DeSorrento is the CEO of Vemo Education, the Virginia-based firm behind a number of ISA programs at colleges like Purdue and coding schools in the US. “It is a very interesting alternative because it is predicated on expected future income of students and their success,” Tonio DeSorrento told Business Insider(4). “It doesn’t look at the asset value, wealth, income level, or the student or his parents. It is truly based on expected outcomes.”

MissionU Puts Real Skin in the Game

MissionU, advertising as a one year alternative to a traditional degree, is an institution funding their ISA concept. Students pay no tuition up front. Upon completion, they are expected to repay 15 percent of their income for three years, but only upon earning a salary of at least $50,000. Here is an example of a program that has skin in the game.  MissionU is counting on the fact that the average salary for data analysts is $80,000. Founder and CEO of MissionU (5), Adam Braun, states, “We set it at $50,000 because if they are earning less than that, we aren’t doing our job. Our view is that we don’t succeed unless our graduates succeed and we can say that because of the income-share agreement.”

The Devil’s Advocate Weighs In

Critics point out that ISA’s can be a form of indentured servitude: they argue that investors essentially own the student until they have completed the terms of the agreement. However, ISA advocates are quick to point out that students have no legal obligation to work in a particular industry. Furthermore, it is illegal for investors to pressure students toward a specific career and, in a sense, ISA recipients are less indentured than students with a traditional loan. With a conventional loan, a student ostensibly has fewer options because they must enter a career where they make at least enough to cover their monthly debt. In theory, someone with an ISA can choose not to work and would never be obligated to pay the investor back.

Critics point out that ISA’s can be a form of indentured servitude: they argue that investors essentially own the student until they have completed the terms of the agreement. However, ISA advocates are quick to point out that students have no legal obligation to work in a particular industry. Furthermore, it is illegal for investors to pressure students toward a specific career and, in a sense, ISA recipients are less indentured than students with a traditional loan. With a conventional loan, a student ostensibly has fewer options because they must enter a career where they make at least enough to cover their monthly debt. In theory, someone with an ISA can choose not to work and would never be obligated to pay the investor back.

The Upshot

ISA’s offer an option for a growing crisis. Tuition costs continue to outpace inflation and salaries. The status quo is not sustainable. Institutions and employers need to consider a worker’s need to be fiscally sound to build our economic future.

There is no silver bullet to resolve the massive debt that we have required of our current and upcoming workforce, but Income Share Agreements deserve a place at the table.

(1) http://www.aei.org/publication/student-and-parent-perspectives-on-higher-education-financing-2/

(2) https://www.pbs.org/newshour/show/purdue-invests-students-futures-new-model-financing

(3) https://www.insidehighered.com/news/2017/05/22/glimpse-some-experiments-income-share-agreements

(4) http://www.businessinsider.com/income-share-agreements-help-students-pay-for-college-loan-alternative-2017-3

(5) https://www.insidehighered.com/news/2017/05/22/glimpse-some-experiments-income-share-agreements

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