• <div class="header-image" style="background-image: url(/live/image/gid/4/3233_shutterstock_778776601.rev.1571938034.jpg);" data-share-image="/live/image/gid/4/3233_shutterstock_778776601.jpg"/><div class="header-background-color"/>

Income Share Agreements: A Solution to the Student Debt Crisis?

July 17, 2019
Based on recent numbers, the US student debt has ballooned to over $1.6 trillion, or nearly 8 percent of national income.[1]

As seen in the graph below, this figure has nearly doubled since the mid-2000s.

Image: Student loan debt doubles as a share of national income. Source: The Washington Post.Image: Student loan debt doubles as a share of national income. Source: The Washington Post.

Increased college tuition has contributed to the rising student debt, impacting graduates’ abilities to pursue careers of their choice and support their families. Additionally, the student debt negatively impacts the economy as they have less money to spend on goods and services.

Policymakers have been scrambling to figure out a solution in addressing the student debt crisis, and several presidential candidates have even made the issue a central component of their campaign platform. However, several educational institutions and coding academies may have already stumbled on a mechanism that can alleviate this problem: income share agreements.

What are Income Share Agreements?

The concept of income share agreements (ISA) is not a novel idea. In fact, its origins can be traced back to the 1950s when economist Milton Friedman developed the framework as a model of repayment.[2] Essentially, ISAs are contracts between the student and school where the student receives educational funding in exchange for promising to share a percentage of their post-graduation income.[3] Coding bootcamps, like the Lambda School, have started offering income share agreements and building alumni repayment plans directly into their business model.[4] In 2016, Purdue unveiled the “Back a Boiler” program and became the first four-year higher education institution to introduce an ISA program.[5] According to Vemo Education, the industry leader in Income Share Agreements, there are now 42 schools that offer a type of ISA program to support their students.[6]

How do Income Share Agreements work?

As part of an income share agreement, students borrow a certain amount of money in exchange for agreeing to pay off the loan with a certain percentage of future earnings. The ISA payback rates and length of repayment contract are determined by each university and by each college major. For example, majors that result in lower starting salaries such as history, English, or social sciences will have higher payback rates and longer terms (e.g. 5%-7% over 10 years). In contrast, majors that typically result in higher starting salaries such as STEM will result in better payback terms (e.g. 3% for 8 years).[7]

Image: Estimated payment schedule for Purdue's income-share agreement. Source: Purdu...Image: Estimated payment schedule for Purdue's income-share agreement. Source: Purdue University, Vemo Education.

Unlike typical student loans, students under an income share agreement only pay when they have secured employment. If students are unable to work, whether due to a family emergency or changing jobs, they are able to halt the ISA payments without accumulating interest until they have found employment again. Additionally, most ISAs have a minimum income requirement, meaning students who fall below this income level are not required to make payments. This creates an interesting dynamic where educational institutions become more outcome-oriented as they are incentivized to improve the quality of education and help students secure lucrative jobs. Furthermore, this leads to increased transparency as incoming students have more data based on future potential earnings by major and are able to make decisions best for their financial situation.

Of course, there may be students who actually end up paying more than they have borrowed – although most institutions have capped the payback rate around 2.5x. In essence, these “high-earning students cross-subsidize the losses that investors suffer on low-earning students. This level of cross-subsidization is not present in traditional student lending, where borrowers make the same payments on equivalent loan balances, regardless of their income levels.”[8]

Image: Cross subsidization, traditional student loans vs. ISAs. Source: Manhattan In...Image: Cross subsidization, traditional student loans vs. ISAs. Source: Manhattan Institute

Potential Benefits

There are many potential benefits for both students and higher education institutions. For students, they have more transparency in choosing majors and are able to make well-informed decisions. Most ISAs have minimum income requirements and students are able to stop payments without accumulating interest if they find themselves unemployed. Similar to an insurance policy, an income share agreement “reduces financial risks for students…”[9]

For the educational institutions, they are essentially buying a “share” in a student’s future, meaning they are highly incentivized to improve their educational offerings and help promote the conditions that lead to graduate success: “if the student makes little or no money in that time, the investors lose out, and the student is free from obligation.”[10]

Potential Issues

While there are many potential benefits with income share agreements, the reality is that this is an emerging field and there is not much evidence to suggest that this will work. Purdue was the first four-year educational institution to introduce an ISA program and that was only three years ago – public data isn’t available to suggest whether their program (or other ISA programs) are successful and sustainable. To date, there are only about 1,000 students total that have signed up for ISAs at US colleges and universities.[11]

Additionally, the ISA market is largely unregulated, meaning there is room for potential abuse of power. For example, future ISA programs may not offer protections like capping the payback rate or offering a minimum income threshold, resulting in students facing severe financial difficulties. Without regulations, “funders can shape ISAs to quietly push much of the risk back onto the students by crafting contracts that work to their advantage, avoiding consumer protection laws and aggressively marketing the alleged advantages of ISAs.”[12]

Recent Developments

The emergence of income share agreements have led to calls for action on the legislative end. In February 2017, Sens. Marco Rubio (R-FL), Tom Cotton (R-AK), and Todd Young (R-IN) introduced the Investing in Student Success Act (S. 268), which would provide a legal structure for ISAs. While the bill was referred to the U.S. Senate Committee on Finance, Congress ultimately did not enact it.[13] In early June 2019, Senator Elizabeth Warren (D-MA) and Democratic representatives Ayanna Pressley (D-MA) and Katie Porter (D-CA) requested information from four-year colleges offering ISA programs, including Purdue University, to learn more about the type of protections they offer to students.[14] In late June of 2019, a bipartisan group of 20 organizations, such as Purdue University, the U.S. Chamber of Commerce, and Social Finance, submitted a letter to Congress “asking for sensible legislation that provides protections for student consumers and a legal framework to guide the work of institutions and providers.”[15]

Conclusion

Purdue’s President Mitch Daniels stated that for ISA programs to become a viable option, “…we need scale. And we need other schools and many more students participating so that the marketplace of potential investors sees repayment history and we all learn more about how well this works.”[16] While the early reports of ISA programs are certainly promising and potentially offer an interesting alternative to traditional student loans, there needs to be more studies and research into these programs. This is where the government could step in and provide incentives for other schools and universities to pilot ISA programs at their institutions. In doing so, we will have much needed data in understanding the effectiveness and sustainability of these programs, and whether they offer a real solution in tackling the student debt crisis.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1]https://www.washingtonpost.com/business/2019/06/25/heres-what-trillion-student-loan-debt-is-doing-us-economy/?utm_term=.1abcf965a14a

  [2]https://www.theatlantic.com/education/archive/2018/06/an-alternative-to-student-loan-debt/563093/

  [3]https://www.edsurge.com/news/2019-02-15-so-you-want-to-offer-an-income-share-agreement-here-s-how-5-colleges-are-doing-it

  [4]https://lambdaschool.com/isa

  [5]https://www.purdue.edu/backaboiler/

  [6]https://vemoeducation.com/higher-education-income-share-agreements/

  [7]https://www.forbes.com/sites/robertfarrington/2019/04/12/income-sharing-agreements-to-pay-for-college/

  [8]https://www.manhattan-institute.org/future-income-share-agreements-to-finance-higher-education

  [9]https://www.rand.org/blog/2019/06/income-share-agreements-isas-whats-risky-whats-promising.html

  [10]http://money.com/money/4568213/income-share-agreements-college/

  [11]https://qz.com/1190860/taking-a-cut-of-students-future-paychecks-has-silicon-valley-investors-funding-education/

  [12]http://rooseveltinstitute.org/income-share-agreements-student-debt-promise-falling-short-reality/

  [13]https://www.congress.gov/bill/115th-congress/senate-bill/268

  [14]https://www.insidehighered.com/news/2019/06/05/democrats-take-aim-student-loan-alternative-and-colleges-offer-income-share

  [15]https://www.politico.com/newsletters/morning-education/2019/06/26/income-share-agreement-supporters-lobby-congress-450909

  [16]https://www.cnbc.com/2019/02/08/purdue-university-introduces-first-income-sharing-agreement-for-students-.html

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>