Income Sharing Agreements Can Help Pay for College – But They’re Not a Flawless Solution
Posted By Donna Fuscaldo on April 27, 2015 at 12:00 pm
The cost of higher education continues to rise at a rapid pace, at the same time that state higher education funding remains at pre-recession levels, shutting millions of Americans out of realizing their dream of a four-year degree.
While most families still rely on student loans and unsecured bank financing to fund a college education, a new approach gaining attention is the income sharing agreement.
With an income sharing agreement, a student gets a fixed amount of money from an investor to pay for school. In return, he or she agrees to pay back a percentage of the income earned over a set amount of years. Let’s say you want to pursue a degree as an engineer. You would hook up with an investor, either in the private market or through a government or school program, and that investor would pay for a portion of your education. In return, you agree to pay the investor a percentage of your annual income, say 5% for fifteen years.
“Students have all sorts of [financial] aid, but they still have out of pocket costs,” says Kevin James, a research fellow with the Center on Higher Education Reform at the American Enterprise Institute. “The traditional way to do that is through loans. But if the education doesn’t pay off, you can easily end up with something you can’t afford.” With an income sharing agreement, if you get a law degree but take a job in customer service, you won’t have to worry about paying back law school loans on your customer service salary. “An income sharing agreement is supposed to be something that ensures students always have affordable payments if the education doesn’t pay off,” says James.
Addressing hefty student loan bills
Proponents of income sharing agreements contend this type of lending will address the massive student loan debt problem that is plaguing this country. According to Experian, the Costa Mesa, Calif. data and analytics company, there is $1.2 trillion in outstanding student debt, with 40 million consumers having at least one student loan with an average balance of $29,000. The job market may have improved, but with the unemployment rate at 5.5 percent, there are still a ton of college-educated Americans out of work or under-employed.
While income sharing agreements can help people from being saddled with expensive student loans for years to come, it’s not a flawless solution. Critics contend income sharing agreements will favor students who are pursuing high paying fields in science, technology, engineering and math and ignore liberal arts and other majors that may not bring as high a salary. There are also concerns students will pursue degrees that have a high success rate of getting them a job, rather than study what they are really interested in.
“A lot of students would get left out of these situations,” says Jeff Bryant, director of the Education Opportunity Network, a Chapel Hill, North Carolina-based blog focused on giving all American children the opportunity to learn. “Investors are going to be more interested in investing in students who they perceive to give them a better return on their investment in the future.” What’s more, Bryant says, it could result in colleges and universities under-emphasizing certain majors like liberal arts or teaching. “It distorts the employment supply, because we know lots of times students major in a certain thing in college but end up doing something completely different when they get out in the world,” says Bryant. “Having people coming from different perspectives and different angles brings more creativity and problem solving to a business process.”
Income sharing agreements are just starting to get noticed
Income sharing agreements aren’t a big business in the U.S. to date, with just a handful of players in the space. App Academy, an immersive, full-time web development and job-placement program in San Francisco and New York City doesn’t charge a tuition, but students pay a placement fee if App Academy finds them a job as a developer. The fee: 18 percent of the first year’s salary. The payments are broken up over the first six months of employment.
13th Avenue Funding is currently testing a small income sharing agreement pilot program at Allan Hancock College in Santa Maria, California. Students in the pilot pay 5 percent a year if they earn more than $18,000. Oregon’s “Pay It Forward” pilot bill, which would use state lottery or bond dollars to help Oregon students pay for college in return for a portion of their income, is getting a review by Oregon Legislators this session for possible funding. And last month, Mitch Daniels, Purdue University’s President, told a U.S. House Committee that Purdue is looking into income sharing agreements that would allow alumni to invest in Purdue students.
Legislation is needed to protect investors and borrowers
If done right, income sharing agreements could help students get a college education without having to worry about paying back unaffordable loans. But in order for that to happen, most experts agree there needs to be legislation in place to protect both the investors and the students. Last year, Senator Marco Rubio of Florida and Rep. Tom Petri of Wisconsin introduced legislation that defines what an income sharing agreement is and provides necessary legal framework for investors and borrowers. Called “The Investing in Student Success Act,” the bill provides information like the maximum length an agreement can be and the total amount of income a borrower can owe each year. “Right now it’s fairly limited in the U.S.,” says Nathan Popkins, founder and CEO of Cumulus Funding in Chicago, which offers income sharing agreements to working adults. “There’s some pretty significant polices and proposals occurring at the state and national level that should allow companies to use this potentially to replace aid and refinance tuition.”