As the cost of college and student loan debt continue to be important concerns for students and families, the idea of income-share agreements (ISAs) has gained traction among some groups. While the structure of these plans can vary, students and parents are hesitantly embracing the idea of the alternative financing model, according to a new report published by the American Enterprise Institute.
The report – written by Alexander Holt of New America – is based on discussions in four focus groups conducted in February 2016. While the results of the focus groups cannot be generalized to represent the wider population of students and parents, the insights can serve as a springboard for future policy discussions, the report said.
Rather than presenting ISAs as an alternative to federal student loans, as previous reports have done, ISAs were presented as an alternative to private student loans. That is, once students max out on federal student loans, they could turn to an ISA, rather than taking out a private loan, the report said.
“With a private loan, borrowers pay back a fixed amount of principal and any accrued interest no matter their income amount, until the loan is paid off,” the report said. “Compared with a loan, an ISA provides a sort of insurance against the downside risk of not making those payments because of unemployment, underemployment, or some other cause of financial hardship.”
However, Holt also points out the “upside risk” that students could end up paying more than the original amount of the ISA if they end up earning a high income. While earning more could help student loan borrowers pay off those loans more quickly, a higher income provides no benefit in terms of repaying an ISA.
Overall, the students and parents in the focus groups reacted positively toward the idea of ISAs, the report said, although they did express some concern about the risks involved. And while student participants were more able to grasp the concept of an ISA, parents struggled with the idea and attempted to describe them with more familiar concepts associated with loans, such as interest rates.
Students who understood the upside risk of paying more over time with an ISA said they would only take one if they thought they would be earning a low income and believed they would pay less with an ISA than with a private loan. Some participants also saw this gamble as “betting against themselves.”
“It seems un-American to me,” one parent said. “If you worked your behind off to get in a job that pays more money, this feels like it’s penalizing you.”
On the other hand, some participants felt like an ISA would be an investment in themselves, and appreciated the fact that someone outside of friends and family would be investing in their future.
“They put money into your education so they also want to see you do well,” one student said.
Students and parents also expressed concern with differing repayment caps and the length of repayment terms for ISAs, as well as the motives of the investors.
“The most attractive parts of an ISA were its ability to mitigate downside risk and provide more flexibility to borrowers,” the report said. “Upside risk and flexibility were also the most commonly cited reasons that other participants did not like ISAs. … Thus, different views of risk led to different impressions of ISAs from participants.”
Publication Date: 12/9/2016