Paying for college as a percentage of future earnings

One of the least enjoyable aspects of being a college adviser is discussing the cost of college with families. I always feel demoralized that there are not enough financially viable options.

So it is with pleasure (but also with a healthy dose of realism) that I report on a promising development that can make college more affordable: Income Share Agreements. Basically, ISAs are a way to provide students with money to pay for college in exchange for a set percentage of their post-education salary over a set number of years.

In 1955, none other than the American grandfather of free-market capitalism himself, Milton Friedman, proposed such an idea in “The Role of Government in Education.” Later in the 1970s, Yale unsuccessfully tried a version of ISAs called the tuition postponement option.

Nowadays with all the concern over rising tuition and the ever-growing amount of outstanding student loan debt — $1.3 trillion total for an average of $37,172 per borrower for the Class of 2016, according to Forbes Magazine — it is not surprising the idea has been resurrected.

You may recall that Republican Sens. Marco Rubio of Florida and Tom Young of Indiana introduced legislation last year called the Investing in Student Success Act (S. 268) to set standards and a legal framework for ISAs, but the bill stalled in committee.

So with ISAs starting to catch on, here’s a closer look at their ins and outs.

What exactly are ISAs?
ISAs are a different way to help students pay for college other than loans, grants and scholarships. With ISAs, students can reduce their tuition costs while in college by agreeing to pay a percentage of future earned income. Some colleges use their own money to fund ISAs while others work with outside capital.

The terms of the ISAs vary with respect to eligibility, duration of payback period and percentages of income. Interestingly, with ISAs, students aren’t accruing interest on the total amount funded, but they do pay back more than the original amount borrowed — although there is usually a cap set on the maximum amount paid back.

With ISAs, if a graduate lands a lucrative job, then investors could earn as much as 2 1/2 times the amount they provided for this student. The flip side, of course, is that a graduate may be unemployed or unable to secure a high-enough-paying job; in those cases, investors lose. Some colleges set up plans that waive future payments if a student earns less than a set amount, for instance, $20,000 annually. Not a bad deal for students.

Where are ISAs?
Purdue University in West Lafayette, Ind., led the way with a program called “Back a Boiler” in 2016. According to the program’s website, 160 students from across 79 majors have taken advantage of $2.2 million in funding. (Read more at https://purdue.edu/backaboiler.)

These funds are backed by the Purdue Research Foundation, a nonprofit corporation set up by a former president of the Purdue University Board of Trustees. The university works with Vemo Education, a Virginia-based firm, to provide the infrastructure for the program. Purdue’s ISAs have a standard payback period of about 10 years, with a six-month grace period post-graduation before payments begin.

Getting more specific, let’s take an example of a Purdue student who is a rising senior and an economics major with an ISA of $10,000. The program requires that he or she pay 3.38 percent of an anticipated salary of $47,000 after graduation for 100 months. This ISA would lead to a total amount paid back of $15,673, compared to a private loan of $10,000 at 9.5 percent fixed interest, which would total $17,126 at the end of a typical 10-year term. Thus, less paid back.

Several smaller, private colleges have followed suit with their own version of ISAs: Point Loma Nazarene in San Diego; Lackawanna College in Scranton, Pa.; Clarkson University in Potsdam, N.Y.; and Gustavus Adolphus College in St. Peter, Minn. In most of these cases, ISAs are being offered to a small cohort of students or as a pilot program. ISAs are also gaining traction with coding academies.

So, what are the important points to consider? Some of the advantages to ISAs are that they:
* Help make college affordable and increase access;
* Reduce student loan debt-load;
* Shift risk of not finding well-paying jobs from student to investor, since repayment is based on percentage and capped; and
* Increase incentives for colleges to help students launch successfully into their careers

Some of the disadvantages to ISAs are the cost to implement and manage these programs, and the unintended consequences of privatizing funding for a public good.

But overall it seems that since ISAs offer an additional funding mechanism that can be less expensive than borrowing they are worth considering.

So, if you are a student interested in these new funding mechanisms I encourage you to take a closer look at the schools where they are offered, and to ask the schools you are thinking of applying to about their plans for ISAs. It’s worth a try!

— Jennifer Borenstein is an independent college adviser in Davis and owner of The Right College For You. Her column is published monthly. Reach her at [email protected], or visit www.therightcollegeforyou.org

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