With the class of 2016 graduating with an average $37,172 in student debt, college may seem like a bad deal. But the Income-Sharing Agreement (ISA) may provide an opportunity to earn a degree without selling one’s soul. Instead, one would sell “shares” in future labor.
ISAs provide an alternative to repaying federal or private loans that students must repay (and don’t forget interest). Under an ISA, an entity funds a student’s college education in exchange for a percentage of the individual’s future income. Low-income students pay a small share, while high-income students pay more. The repayment lengths and periods vary and are pre-determined by the investor.
The New America Institute and American Enterprise Institute have published research supporting ISAs over traditional financing. First, they ensure students can afford payments since they vary with income. Most programs defer payments when students have no income. Thus, students who experience brief unemployment or low incomes will not face insurmountable debt that could wreck their credit.
They can also be used to fill gaps between scholarships and tuition costs, rather than taking high-interest private loans that could lower total tuition costs.
Second, funding entities should be able to make a profit from the high-earning students, despite losing some money from low-income students. If colleges offered ISAs, like Purdue does, it would align student and college incentives. As I wrote previously, colleges reap rewards of high tuition but do not lose when students default on loans. Colleges receive money upfront, regardless of the student’s future well-being. Thus, if colleges were paid depending on student success, high-quality educations would thrive, while poor institutions would die.
ISAs allow students to attend college, regardless of socioeconomic status or startup capital. They can also enroll without government aid or subsidy. If ISAs are popularized, they could reduce higher education subsidies.
The product also has its problems. An AEI study pointed out that tax and legal lending laws must be established to avoid private-lender lawsuits. Other complexities include recording a graduate’s true income, that colleges require capital to pay professors and fund buildings, and that investors will not receive their return on investment for several years.
ISAs are not a new idea. Milton Friedman first suggested students sell “human capital” (their future labor) in 1955. A few schools have implemented the program, but most are trade or technical schools that see a high turnaround rate, and take 18 percent of their first-year salaries. Purdue University is the lone four-year college boasting its own ISA program that distributed over $2 million to around 160 upperclassmen in 79 different majors in 2017.
Purdue is expanding the program next year and promised to share its findings. Purdue Research Foundation COO Brian Edelman told Business Insider that he believed it was feasible for all Purdue students to use ISAs, if needed.
Rep. Luke Messer (R-IN) in June introduced the Investing in Student Achievement Act of 2017 that details ISA legal framework so more private entities will join as lenders. As the legal standards are set for lenders, ISAs could revolutionize the path to a degree without crushing student debt.