For students and administrators searching for a viable alternative to student loans, meet the Income Share Agreement (ISA). Imagine, instead of investing in a stock, an individual or organization invests in a student. In exchange for paying for all or part of that student’s education, the student agrees to pay back an affordable percentage of his or her income for a fixed number of years following graduation.
The result - instead of paying back a loan with a fixed amount due each month, the student pays a fixed percentage of the income. Unlike a loan, a student with an ISA pays what they’re able to afford as opposed to paying the same amount each month no matter what their income.
The concept of the ISA is the brainchild of Nobel Prize winning free market economist and father of the school voucher (among other things) Milton Friedman. The idea itself was not tested until the early 70’s when Yale set up a group of undergraduates. The investors paid for the education of the entire cohort with the graduates making payments until the total amount borrowed was repaid. The group approach left a number of the participating students frustrated because they felt forced to pay for those students who made less or were unable to pay at all. While the group approach proved unsatisfactory, investing in an individual could offer a viable alternative or supplement to student loans.
Currently ISA’s have no fixed guidelines. This means that investors can negotiate terms based on a student’s field of study and the type of employment and income they can expect. This would mean students attending top-notch schools studying for high income jobs are far more likely to get better terms on an ISA than say, students attending mid-range institutions studying liberal arts. The less probability of a high paying job following graduation, the riskier the investment.
Other features of an ISA could include:
- An income exemption that allows borrowers to skip payment if their income drops below a certain amount
- A buy-out clause that lets the borrower pay off their ISA in advance for a specific amount
- An agreed upon payment cap which would help high-earners avoid paying more than they borrowed initially
The biggest criticism of the ISA is that it resembles a form of indentured servitude. In other words, the investor who owns a percentage of a student’s income for a fixed period of time owns a part of the student in the same way many early American colonists agreed to work for seven years in order to buy a parcel of farm land from a wealthy landowner. Proponents of the ISA disagree arguing that a student loan is actually more punitive because a student must work to meet its fixed terms where as a student with ISA no has legal obligation to work in a specific field or make a particular amount of money.
Terms of Success
Unlike loans that offer the same terms to all borrowers, an ISA could allow for discrimination since an investor can offer different terms to different borrowers. If, to minimize their risk, investors are only willing to fund those students attending schools where they are almost guaranteed a career in high paying field, students pursuing jobs in social services, teaching or the arts are less likely to benefit from this new emerging product.
ISA’s in Action
Kim Clark, Writing for Money Magazine* points to three significant ISA programs already underway. One of these programs, Purdue’s “Back a Boiler” is open to upperclassman exclusively with, “income share payback rates and time period(s)*” that vary depending on the amount borrowed and the student’s major and number of years attending. The investor Education Equity offers ISAs to Golden Apple Scholars at 40 Illinois Colleges. These teachers-in-training have the option of borrowing up to $10,000 with repayment over ten years at an interest rate of 3.25%. Taking a decidedly different tact, Clarkson University is offering future entrepreneurs a full four years of free tuition, “in return for a 10% equity stake in an applicant’s business*” with no time limit set for repayment.
The Bottom Line
While the effectiveness and reach of ISAs are yet to be measured, their flexibility offers investors and higher education an opportunity to offer a variety of options to unique students or student groups minimizing risk and ensuring returns. The rise of interest in ISAs as an alternative to loans has not gone entirely unnoticed by the Federal Government which has begun offering Income Based Repayment (10 -15 year repayment based on discretionary income**), Income Contingent Repayment (20% of discretionary income or a fixed payment over 12 years recalculated each year based on total income**) and Income Sensitive Repayment (monthly payments based on annual income up to 15 years**). While these programs focus on assisting post grads by consolidate their loans, the terms are similar to those offered upfront by ISAs.
For a generation that has struggled under the burden of debt in order to afford an education, and for business offices at colleges and universities across the country, the rise of creative approaches like ISA could be a good thing.
Where to Find Income Share Programs to Pay for College, by Kim Clark
**Federal Student Aid:
Repay Your Direct Loans and Federal Family Education Loan (FFEL) Program Loans
Income Share Agreements, and Their Role in Making Higher Education More Affordable http://www.forbes.com/sites/ccap/2015/03/12/income-share-agreements-and-their-role-in-making-higher-education-more-affordable/#45691500866b
US News & World Reports:
9 Things to Know About Income-Share Agreements, by Kevin James https://www.usnews.com/opinion/knowledge-bank/2015/08/04/why-income-share-agreements-can-be-an-alternative-to-student-loans
The Progressive Case for Income Share Agreements
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