ISAs allow students to pay no tuition upfront, in exchange for a percentage of their future income after graduation.
This fall, 19.9 million people are expected to attend college or university in pursuit of a degree. It is expected that around one million students will default on their student loans as well. In the past, higher education was seen as a ticket toward higher salaries and better jobs, but today, with student debt balances appreciating, people are starting to think twice about pursuing further education. As the price of tuition increases — the price of college is appreciating almost eight times faster than wages — students are increasingly relying on debt to finance their education. One method to address this problem that has already gained traction in the form of a bipartisan bill — is Income Share Agreements (ISAs).
Income Share Agreements
Income Share Agreements, for which bipartisan legislation is being considered, allow students to pay no tuition upfront, in exchange for a percentage of their income after graduation. This means that the risk of pursuing education — which is higher for minority groups, who typically take out more loans — is shared by the school, whose returns will be proportionate to the student’s success. Students who use ISAs will only make payments when they earn over a certain amount — typically between $20,000 and $60,000 — which ensures that they will not make payments if they are underemployed or unemployed.
Congress has started paying more attention to the problem of student debt and its underlying causes. Sen. Elizabeth Warren, for example, has proposed a plan that would provide students with free college and loan forgiveness of up to $50,000 to those who earn under $100,000; partial forgiveness would be provided to those who earn up to $250,000. These measures fail to address the systemic problems causing student debt increases, including college accountability, or the lack thereof, and the lower rates of state funding for colleges.
One of the many benefits of ISAs is to increase access to education for people who would traditionally not pursue it. There are three main reasons for this:
1. ISAs reduce debt for underrepresented groups
First, ISAs would help reduce the debt burden for people in underrepresented groups, who are particularly affected by the burden of debt. Nearly 85 percent of African-American bachelor’s degree recipients carry student debt, compared to 69 percent of white bachelor’s degree recipients, according to a report by the Center for Responsible Lending. In addition to being more likely to take out a loan, African-Americans typically borrow more money — the average Black borrower owes closer to $34,000, compared to $30,000 for white borrowers. On average, African-Americans accumulate less wealth than those of other groups. Median financial assets for families earning $50,000 to $60,000 in 2016 were $8,000 for Black families and $34,280 for white families. Therefore, they have less capital to pay for their education.
Student debt can present a number of problems for minority groups. The most prominent is that, due to existing inequalities in the labor market, African-American borrowers find it more difficult to earn the money they need to keep up with student loan repayments. ISAs provide minority groups an alternative to debt that allows them to make payments on more flexible terms, so they do not have to worry about carrying significant amounts of debt. ISAs also ensure that students are only paying for an education that helps them succeed. If students suffer from unemployment or low salaries after graduation, their payments will be lower.
2. ISAs make federal student aid more accessible
Second, ISAs assist people who are unable to access federal student aid, or who have exhausted their federal options. A new report from the Department of Education found that the average financial aid awards for white borrowers were $1,100 higher than those offered to African-American borrowers. Therefore, African-Americans are more likely to turn to other options such as more federal loans or private loans, which typically come with higher interest rates and less favorable terms.
ISAs provide an alternative to private loans for students who are looking to attend college, which will only need to be paid back if the student succeeds. This is particularly important in schools that are Title IV ineligible, such as coding boot camps, but that still confer a high-quality education. Indeed, ISAs encourage people to look at other options because the inability to access federal aid is less of a problem, and students do not have to rely solely on private loans to finance their education.
3. ISAs won’t hold you liable if education does not help you succeed
Finally, ISAs create a strong incentive alignment between schools and their students. In the current student loan system, borrowers are liable to repay their debt, even if their education did not help them succeed. ISAs link the school’s financials to the success of their students, and the school assumes some of the risk associated with a student pursuing further education. Strong incentive alignment will encourage institutions with poor outcomes to work toward modernizing their offerings and — for underrepresented groups — spend more time understanding the specific issues they face.
Another way ISAs can help underrepresented groups is through using them to start community learning funds at local or state governments. The San Diego Workforce Partnership recently partnered with the University of California San Diego Extension School and raised capital from a number of philanthropists to help local San Diegans access the capital to pursue further education. When a student repays money to the fund after they have graduated and have a good job, that money will go toward financing the contract for another worker who is looking to “upskill” or acquire new knowledge.
ISAs will not solve the student debt crisis, nor the systemic issues that higher education faces today. However, ISAs have the ability to align the incentives of schools and their students, offer an alternative to debt for those unable to access other options, and also help reduce the debt burden for underrepresented groups which suffer disproportionately from the effects of debt. ISAs could unlock new educational opportunities for millions of underrepresented Americans who have the potential to succeed in further education.
James Gallagher is a researcher at Career Karma, where he specializes in alternative forms of student financing, and higher education reform. James has published a new report on the current ISA landscape: “The State of the ISA Market 2019.”
Ruben Harris is CEO at Career Karma and co-host of the Breaking Into Startups podcast.
This piece originally published on September 16, 2019.
