The idea of utilizing income-share agreements – upfront money in exchange for a percentage of future earnings – to finance a college education is increasingly popular among some who have concerns about the growing levels of student debt, and the complexity of loan repayment.
But the idea is so new that it's not entirely clear how the system would function, making it hard for policymakers to agree on the best path for moving forward. But a new report released by the American Enterprise Institute's Center on Higher Education Reform expresses "cautious optimism" about the future of income-share agreements, and details three potential models for how ISAs could function as a viable financial aid model.
The most commonly known model of an ISA relies on private financing. One or more private investors gives a lump sum of funding to a student to pay for college. In return, the student would pay back to the investors a percentage of his or her future earnings for a set amount of time. Unlike student loans, this type of ISA is more of a gamble in the sense that the investor might or might not make a profit. Likewise, the student runs the risk of paying back more than was originally given.
But in the report, author Jon Marcus, higher education editor of The Hechinger Report, explains two other models for ISAs: a philanthropic model that recycles the money in a pool of money that eventually goes to other students, and a model backed by higher education institutions (such as Purdue University) that use their endowment funds to finance students' educations.
For some students, Marcus wrote, ISAs are an appealing form of insurance, and a way to afford the cost of alternative higher education options where students can’t use federal financial aid funds.
"Instead of having student-loan debt hanging over their heads, dropouts earning much less than they might have with degrees will have to pay little or nothing," Marcus wrote. "ISAs are also an option for people who have an ideological preference for private versus publicly subsidized financing, who have a concern about the state of the economy or an aversion to debt, or who are among the at least one million students who attend schools that do not offer federal student loans, from conservative Christian and community colleges to computer-coding boot camps."
In the report, Marcus also described how ISAs could create a good kind of competition in the higher education market that would incentivize schools to better serve students, become more transparent, and lower their costs.
"Some advocates say that ISAs represent capitalism with a higher purpose, offering a chance to invest not in tech stocks or commodities futures, but in people’s lives," Marcus wrote. "At the very least, those funded by investors seeking a return could bring market forces to bear, steering students toward the institutions and majors that promise the highest prospective pay instead of those with the nicest dormitories and fitness centers or best football teams."
Despite the potential benefits to the ISA model, there are several unanswered questions. The idea isn't yet established enough to thoroughly track the outcomes of students who have used ISAs and make a broader statement on the model's efficacy. There are also more nuanced questions, such as how to avoid excluding certain types of students, whether ISAs can be discharged in bankruptcy, and how investors could collect from students who do not meet their payment requirements. There's also the question of whether ISAs are truly a better option than federal student loans for some students.
"It could take years before accurate information about returns come in, considering that many of the people who have received ISAs are still in school or have only just begun up to 15 years of repayment," Marcus wrote. "In the meantime, providers are concentrating on their other challenge: getting decisive regulatory and tax guidance, the absence of which may be holding off investment."
Publication Date: 3/11/2016