Income Share Agreements are the Future of Higher Education
Tags: Loans, College, Higher Education, Education, Finance

The Economist cited a story about a student named Andrew Hoyler who had attended Purdue University and had landed a job that made $1900 a month in his first year of work. Without an Income-Share Agreement, his monthly loans would have more than $1300 a month, and more than likely would have forced Andrew to seek supplemental income to offset these high payments. However, because Andrew opted for the ISA, he will pay 7.83% of his salary over the next eight and a half years. As Purdue offered the ISA to students, the university saw a 5–7% return on investment while improving the chances students landed work after graduation.

At Norwich University, they’ve started an ISA program for students who cannot take on loans or who take longer than the traditional eight semesters to finish their degree. While students are unemployed or earn below a certain threshold, they don’t have to pay anything back. Since employment and salary determine repayment, it’s possible providers could be seen as discriminating against recipients who choose lower-paying professions, whereas federals loans offer the same terms to all borrowers.

EdSurge, an ed-tech company that publishes census-like databases and newsletters, put together a documented discussion with three prominent individuals in the higher education field.

The main conclusion taken from the discussion was with the infinite inflation of debt, schools are facing the brink of closure unless they can find new ways of financing. In 2017, schools began experimenting with income-share agreements and alternate forms of financial aid and this continued experimentation will be the most important new innovative practice in higher education in 2018.

To develop its ISA program, Norwich University tapped Vemo Education, a Virginia-based education technology company that works with higher education institutions to design, install, and maintain income share agreement initiatives. Norwich University’s new program, the first ISA initiative offered at one of the nation’s six designated senior military colleges, includes opportunities for sophomores, juniors, and seniors to opt into income share agreements. Seniors will also have access to a specialized ISA program, designed to close funding gaps in their final semesters and help them complete their degree.

Income-share agreement plans, such as the one recently developed by Purdue University, allow students with loans to pay a set amount of their wages after graduation. The ISA payments adjust according to levels of income. Also, the duration of the agreement is only for a predetermined amount of years and allows community colleges to sell bonds to fund new delivery systems as another innovation in financing.

The development of a “College Finance Innovation Fund” could accelerate ideas to lower debt and make schools more accountable for their graduate’s success. Federal data finds that 12 years after enrollment, students with debt still owed 66% of what they had borrowed and 27% had defaulted. Colleges face no equal long-term financial stake in their students’ education. A school’s obligations are done once the tuition is paid and the last exam is graded. While college costs are putting a strain on all American families, the majority of student debt is falling heavily on the lowest income students. Income Share Agreements provide three major advantages that will increase income class mobility and decrease class division in education and achievement.

ISA’s give students protection form income volatility ISAs demand colleges take interest in student’s post-graduate success Students no longer bear the entirety of the risk of their educational investment

Schools that adopt ISAs are making great commitments to transparency. Modern ISAs address the issue of repayment by establishing caps on how much students can pay. In some cases, students pay as low as 100% of tuition. With other programs, like Purdue’s, caps are set higher (say, 250%) to create a dynamic where high earners offset the cost of their lower earning peers.

Designed by Vemo Education, Messiah College is instituting a new ISA program for participating students that will have them pay between 3–3.5% of their post-graduation income for a set period. Payments are waived for graduates whose annual salary is less than $25,000, alleviating the burden of debt for those who make less than expected. Messiah College is one of the first two private colleges in Pennsylvania to launch an ISA program. The adoption followed after the model was recognized as an innovative financing option for Pennsylvania’s higher education institutions.

The Association of Independent Colleges and Universities of Pennsylvania announced it had approved Vemo Education as a preferred program for Pennsylvania colleges and universities.

“We expect that as they learn about this new preferred program, our members will find income share agreements to be a new tool to reduce barriers to enrollment and retention. And colleges that offer income share agreements have a greater stake in their students’ success after graduation.” — Tim Alexander, Vice President of Finance and Administration of AICUP.

Two congressional backed bills offer a promising start to making ISA’s more viable in student financing. The bills propose to cap the percentage of income that students would pay back as part of the ISA in addition to a minimum income threshold for payment. Lawmakers could also consider additional rules to deter lenders from discriminating against low-income students and families with low credit ratings, but before these bills become a reality, Congress and the administration need to establish rules that provide clarity to potential investors and protect students from abuses.

Income Share Agreement investors earn a profit only when a student is successful. They offer students better terms for programs that are expected to be of high value and have strong incentives to support students both during school and after graduation. Because there are no taxpayer dollars at risk, ISAs give an opportunity to educational providers who are currently shut out of the federal financial aid process through accreditation and other regulatory barriers.

ISA’s were a disaster when first instituted at Yale in the 70’s because low-earners paid back at different rates than high-earners. This frustrated students who felt like they were holding the bag for others. However, this time around, ISAs are seeing tons of growth and demand given the current interest. Firms like 13th Avenue, Cumulus Funding, Upstart, Pave, and Vemo Education are providing opportunities for more universities to get on board with this updated financial model.

National student loan debt now amounts to approximately $1.4 trillion among 44 million borrowers, who face an average debt of $35,000. Due in part to this ballooning debt, there is increasing skepticism about the value of a college degree as the cost of college has grown at more than twice the rate of inflation. To combat this, ISAs are being used as a replacement for private loans and incentivizes schools to make sure their graduates find employment.