As new and innovative ways to help students pay for higher education are considered, income share agreements (ISAs) “should have a place in the landscape” and deserve more attention from policymakers, according to a new paper from the Brookings Institute.
Under an ISA, an individual is able to gain access to funds for college in exchange for promising to pay back a fixed portion of their future earnings, such as 10 percent or 20 percent of earnings, for a set time determined by the agreement.
Because the amount paid back under an ISA is determined by the amount an individual earns, individuals do not know how much they will ultimately end up repaying. So graduates who earn less than expected will pay back less than the full amount “borrowed,” while those who earn more than expected will repay more than their share.
In the paper, Brown Center on Education Policy fellow Beth Akers argues that ISAs have the “potential to offer improvements over traditional loans in terms of shielding students from risk and providing information about quality” and should therefore be given more consideration as a vehicle for higher education funding.
According to Akers, ISAs have the potential to solve or alleviate many challenges of the current system for higher education funding, including the risk of taking on debt to pay for education and having to repay it in a poor labor market. While there are programs that base repayment on income, such as the federal Income-Based Repayment program, they are not taken advantage of by many students and do not take into account students’ future income prospects.
ISAs, Akers argues, “provide an elegant solution … by allowing students to access their future earnings and simultaneously providing insurance against bad financial outcomes.” The structure of repayment under ISAs, in which payments rise when an individual’s income is high and decrease when income is low, effectively “hedges” the risk of borrowing to pay for education.
In addition, ISAs have the potential to improve the collection and dissemination of information on higher education quality and financial return because such information is needed to set the terms of the financial agreement, Akers writes. If ISAs were broadly used, institutions would have more incentives to price programs of study based on potential earnings, possibly leading to lower tuition for programs that lead to lower paying careers.
Despite the benefits of ISAs, broad adoption of the financial agreements has not occurred largely because of the ongoing regulatory obstacles they face. Akers argues that Congress should provide regulatory clarity and pass legislation with protections for individuals who enter into ISAs to make the tools more available to students.
“As we face the challenges of reforming our system of higher education finance to meet the needs of today’s students, no potential solution should be left off the table,” Akers writes. “Enabling ISAs to operate more broadly in the United States will enable policy makers, advocates, and researchers to explore their potential for improving the well-being of those who choose to finance investments in higher education.”
Publication Date: 10/21/2014