Report: There Is Enough Support for Income-Share Agreement Market to Expand

By Allie Bidwell, Communications Staff

It's yet to be seen if income-share agreements (ISAs) will take off as a more popular way of financing a higher education, but students and parents appear to be interested in the method as an alternative to student loans, according to a new report from the American Enterprise Institute (AEI).

The report, the fourth in a series examining the viability of ISAs and perspectives on the model, is based on a nationally representative survey of 400 college and high school students, and 400 parents of current and future college students. In a report on the survey, Jason Delisle, a resident fellow at AEI, wrote that while few respondents had initially heard of an ISA, more than half said they preferred ISAs over loans when given more information. Still, Delisle wrote, the survey did not give enough information to predict whether someone (based on factors such as income groups or school types) would favor an ISA over a student loan.

“As anxieties over college costs have grown in recent years and students and families increasingly worry whether their investment in higher education will pay off, ISAs begin to look like an appealing alternative to borrowing,” the report said.

Previous reports on income-share agreements from AEI have focused on student and parent perspectives in assessing the upside and downside risks of choosing an ISA over a private loan, discussing three potential models as viable options, and how private financing could foster innovation.

While state and federal policymakers have shown interest in ISAs, and some individual institutions are experimenting with the financing model, there’s still a long road ahead before the financing model could become widespread.

In AEI’s latest report, Delisle writes that just 7 percent of students and 5 percent of parents had heard of an ISA. However, it appeared that the more information respondents received about ISAs, the more favorably they responded. The favorable responses began at a low of 23 percent with limited information, to more than half with more detailed information. Still a large portion remained “uncertain or confused” about ISAs.

“If policymakers look to reduce the federal government’s role in student lending in years to come – or opt not to increase borrowing limits over time, eroding the purchasing power of federal loans – then the need for additional sources of private financing will only grow,” the report said. “In the meantime, this first major survey about attitudes toward ISAs demonstrates that there is enough interest among parents and students to support an ISA market that is much larger than the one that exists today.”

 

Publication Date: 1/26/2017


Theodore M | 1/30/2017 5:26:17 PM

David,
I understand the concerns over who is funded, but it does not have to be that way. As we have shown in the Purdue Back-a-Boiler program, this type of funding appeals to students of all majors and projected income. Our first year population of ISA recipients looks very much like our undergraduate students as a whole. We had students from 86 different majors from each of our undergraduate colleges.

This is not to say that there will be those who want to skim the top, but to be honest, for those most likely to make large sums of money, an ISA may not be the way to go from their perspective.

What we need is consumer protection laws that will prevent grossly unfair contracts from being signed. We need to protect students from getting into an ISA that is akin to a payday loan.

I would also suggest, that community college students really have a limited need for an ISA. Where the ISA comes in is as an alternative to private and PLUS loans. At the two community colleges I worked at these were virtually non-existent.

We cannot let our fear of what could be let someone else control the direction of this program. If NASFAA does not take the lead in providing consumer protections, they just might never exist.

Ted Malone

David S | 1/26/2017 9:15:14 AM

I look forward to reading this report; on one level, any new avenues of financing options are welcome, if they help some students, great. But I have some fears about ISA's. One is that they are so far completely unregulated, and unless a student has an attorney look over the agreement, they could be stepping into something that they don't fully understand, with the possibility for bad actors on the investor side taking advantage of them. And with a political environment that is not particularly consumer-friendly, I'm not even sure that regulations would be the right ones.

But an even bigger concern is that investors in ISA's want to make money on the deal. This will likely mean that ISA's will be more readily available to those students who, based on their field of study, the school they attend, their grades, are considered better risks. So engineering majors over music majors. Elite graduate business school over community college. Student who already has every possible advantage over those who have struggled just to make it onto a campus. And it's no secret that there are lawmakers here and there who want student loans and even all publicly funded financial aid, even tuition rates, to work this way. Open the door with ISA's, how much momentum does this concept of "we're only funding those who are going to make a lot of money when they're done" gain throughout all financing opportunities?

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