College tuition partners
First-generation college student and recent UC Berkeley grad Ulises Serrano, an aspiring higher ed administrator, will enter graduate school this fall without any student loan debt. That’s thanks in part to the income-share agreement (ISA) used to finance the first two years of his post-secondary education at Allan Hancock College in California.
For Serrano and 10 others, the community college had piloted the ISA concept via the nonprofit 13th Avenue Funding. Grants and scholarships covered the rest of his undergraduate education.
Serrano dreams of helping others with access and equity in higher ed. “I have a sense of ease right now,” he says of the fact that his only student loans will be from grad school. While he still must pay part of his eventual salary back to the ISA investor, the terms are much more flexible than with a loan, Serrano adds.
For example, ISA funding doesn’t accrue interest, and there’s no set amount to pay back—students agree to pay a percentage of future income for a set number of years.
The ISA concept has been in existence since the 1950s, when American economist Milton Friedman wrote about the possibility.
The idea, which many describe as selling stock in yourself, is now an emerging hot topic within the higher ed financing debate—with politicians such as Marco Rubio and Chris Christie bringing up ISAs as one way to potentially ease the current student debt crisis.
The ISA has its critics, too. David Bergeron, senior fellow for postsecondary education at The Center for American Progress, advises caution, especially when a student combines an income-share agreement with federal loans.
ISAs result in more debt for students, “even though they’re telling you it isn’t a loan,” says Bergeron, also former acting assistant secretary for postsecondary education at the U.S. Department of Education, during the Obama administration.
Debate about the value of income-share agreements aside, colleges and universities are beginning to explore them further. Following are six points higher ed leaders should know.
Income-share agreement providers
There’s only one large-scale ISA offered at a U.S. university—for now. While the ISA concept could mean a company dealing directly with students, it’s generally considered something that’s available only via an institution—and Purdue University in Indiana is the one known current example.
Purdue launched its ISA initiative in fall 2016 under the name Back a Boiler, giving a nod to the school mascot and nickname for fans.
Since then, 160 students received funding totaling approximately $2.2 million; Purdue self-funded the ISA for the launch but may try to attract investors in the future.
Participating students represent 79 academic majors and come from six of Purdue’s colleges, including Engineering, Polytechnic Institute, Health and Human Sciences, Liberal Arts, the Krannert School of Management, and Agriculture.
“One of the concerns critics have is that people would want to cherrypick and offer it only to students who are likely to earn a lot of money, but we wanted to make it available to all students,” says Ted Malone, executive director of financial aid.
Ultimately, the students who chose to participate turned out to be “very representative of what Purdue as a whole looks like,” he adds.
For 2016-17, juniors and seniors were eligible, and in 2017-18, sophomores with declared majors will also be allowed to participate.
In 2015, a combined Purdue University and Purdue Research Foundation team worked with the Jain Family Institute, a nonprofit think tank that supports the development of ISAs, to select a master servicing partner for Purdue’s Back a Boiler ISA program.
That partner, Vemo Education, helped design the ISA and provides its operational tasks: making sure everybody gets the right disclosures on time, that they sign all the contracts, that status is tracked carefully, and that future employment is verified.
In addition to launching Back a Boiler, Purdue President Mitch Daniels announced a four-year tuition freeze to further a college affordability goal.
Zachary Meyer, a senior at Purdue studying financial planning who plans to graduate in December 2017, is participating in the Back-a-Boiler program with a $10,000 ISA.
“My payment adjusts to my income, so I know I will always be able to afford my payments,” he says. “If you’re not making enough money, they aren’t expecting you to start paying it back until you are on your feet.”
Meyer also will never have to pay back more than the cap (two-and-a-half times the original amount).
Purdue has gotten a lot of inquiries from other institutions about the ISA initiative. In response, the university and Vemo have agreed to assist other institutions considering implementing ISA agreements.
ISAs are not for every student. Casey Jennings, chief operating officer of 13th Avenue Funding, says risk—not affordability—is a key factor in the cost of college.
“For low-income students who have to borrow multiples of their family’s wealth, it is extremely risky because they may default, and worse yet, if they don’t graduate, they still have a loan to pay back,” says Jennings.
In 2016, 1.1 million Americans defaulted on a federal student loan, which is a 14 percent increase from the preceding year. Americans are now in default on $137 billion in federal student loans. Those most likely to default may also be most suitable for an ISA.
“ISAs aren’t right for everyone, but I believe for about one-third of students, it’s a better way to fund college,” he says.
ISAs act as sort of an insurance policy for students in case they don’t earn enough to make payments when they graduate or if they lose a job or want to take time off in their career for personal reasons.
Those who graduate from college expecting to enter professions that don’t have high wages seem to be the best candidates for ISAs—and the risk from these individuals gets balanced out with others who will earn more, according to ISA providers.
With an ISA, graduates can’t default in the same way as with student loan non-payment, but those who fail to pay the income share would be reported as delinquent to a credit bureau—and a collection agency could be used to help obtain the payments.
“Students who come from upper-middle class or wealthy families don’t need a loan with an insurance product, which is essentially what an ISA is,” says Michael Stynes, executive director of the The Jain Family Institute.
Tonio DeSorrento, CEO and director of Vemo Education, says, “If you are a lower earner, you’re always better off in an ISA than a private student loan or a student loan generally based on income-based payment.”
ISAs are based on income potential rather than parent income. Traditionally, college financing and parent income go hand in hand. But with ISAs based on the student’s ability to repay, college graduates shouldn’t be stuck with a payment they can’t afford.
Many proponents of the concept believe income-based repayments better reflect the value of a college education, compared to the preset debt incurred through a loan. “What you pay for college should be linked to the value you get there—so income-share agreements align what you pay with what you get,” says DeSorrento.
ISAs are not necessarily meant to replace federal student loans. Instead, they’re an alternative to other options once federal loan opportunities are exhausted. Federal direct loans are generally known to be a safe way to pay for a college education.
The additional loans families may take out are what ISAs are designed to replace. Private loans and Parent Plus loans are often high-interest and can be difficult for students and parents to repay; they also have high default rates. “ISAs are a safer and more powerful alternative,” says Stynes.
Institutions must be prepared to overcome the misconception that ISAs are like indentured servitude.
Ted Beck, president and CEO of the National Endowment for Financial Education, recalls that when he first heard about ISAs, he fell into that camp. “However, as I’ve looked into the structure of them, they are very interesting and have some potential,” he says.
Overcoming first impressions about ISAs, as Purdue has done, is important for any higher ed institution launching an initiative.
“Purdue’s program is pretty thoughtful and answers some of the big structural considerations,” Beck says.
Beck’s organization doesn’t offer education to the public or financial aid offices about ISAs, but he says it might be a consideration as more schools start programs and track their success.
There is no legal framework governing ISAs, but that may change.
In February 2017, Florida Senator Marco Rubio and Indiana Rep. Todd Young introduced the Investing in Student Success Act to create a legal framework for ISAs. Rubio introduced the bill to the Senate in the last Congress, and Young introduced the companion bill in the House.
The bill provides a definition of income-share agreements so both the investor and the student would know what their responsibilities would be under the agreement before signing on the dotted line.
Elaina Loveland is a Boston-area writer.