Taking a Cut of Student's Future Paychecks Has Silicon Valley Investors Funding Education

"The first experiment was a failure. In the 1970s, Yale University offered tuition to a group of students in exchange for a percentage of their future incomes. Adapting a 1955 idea by economist Milton Friedman to sell 'human capital investments,' the university paid the students' tuition. In return, the university hoped to recoup its investment by having the group collectively repay it as a share of each individual's income," Quartz reports.

"It didn't work out. Low-earners paid back at different rates than high-earners, leaving frustrated students holding the bag for others. It was, in the words of one higher-education policy expert, 'an utter disaster.'

After lying nearly abandoned for 40 years, that former disaster has reemerged in a financing model called modern income-sharing arrangements (ISA), which aim to fix some of the earlier flaws posed by similar arrangements (students pay back their own commitments out of future earnings, for one thing). The model is attracting a new generation of startups, as well as investors, eager to bail out American students drowning in $1.3 trillion in student debt. The Brookings Institute estimates as much as 40% of students who entered college in the early 2000s may default on their loans by 2023, based on historical trends.

One of the first firms to enter the US market was the Chilean firm Lumni founded in 2002 (although it only came to the US in 2009) followed by 13th Avenue (2009), Cumulus Funding (2011), Upstart (2012), Pave (2012), and Vemo (2015). Not all are still signing ISAs, but current interest seems to be based on growing demand. Vemo's co-founder and CEO Tonio DeSorrento says it has seen its ISA volumes triple year over year, and it credits major universities and training programs for getting on board after years of wariness. Purdue University, Lackawanna College in Pennsylvania, and New York's Clarkson University all have ISA programs. Vocational schools such as the code bootcamp App Academy, MissionU, and tech apprenticeship Kenzie Academy are using them as well.

That's just the beginning, says University Ventures co-founder Ryan Craig, who has invested in Vemo and college alternative MissionU. 'I'd go as far as to say that in five years, any postsecondary education or training program that's two years of length or less and that's attempting to charge tuition will be seen as an anachronism,' writes Craig by email. 'It will be a negative market signal to prospective students, who will wonder why they're demanding tuition upfront rather than taking an income share (i.e., is this a scam?).'"

NASFAA's "Headlines" section highlights media coverage of financial aid to help members stay up to date with the latest news. Inclusion in Today's News does not imply endorsement of the material or guarantee the accuracy of information presented.

 

Publication Date: 2/12/2018

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