Purdue University Offers Income Share Agreements as Alternative to Student Loans
Posted By Donna Fuscaldo on June 1, 2016 at 9:59 am
There’s no question student loan debt is a huge problem, but for many students, there is no other option. That’s why Purdue University, through its Purdue Research Center, is testing an alternative to debt: an income share agreement in which rising juniors and seniors can apply for education money in exchange for a percentage of their future earnings.
The idea is to give students a choice besides taking out a loan or having their parents co-sign for one. It’s also an acknowledgment that the high level of student loan debt, more than $1.35 trillion at last check, impacts more than just the individual borrower.
“Debt creates substantial risks to students if they cannot afford their payments during and after college, whereas ISA payments adjust according to levels of income,” says Cynthia Sequin, vice president of marketing and communications at the Purdue Research Foundation. “In addition, there will be a minimum income threshold and a maximum payment cap, so students who use the program will not pay if they do not meet a minimum income level, while those who earn a substantial amount of income will not pay above a certain maximum amount.”
In general, with an income sharing agreement (or ISA), 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 they earn over a set amount of years. Up until Purdue Research Foundation’s announcement, ISA’s weren’t in the mainstream, with only a handful of schools offering it and an even smaller number of companies investing in student’s future income.
Income share agreements slow to be adopted by many
One company that has been in the ISA business for nearly seven years is 13th Avenue Funding, the non-profit which is serving as a consultant to Purdue Research Foundation on its ISA program. Casey Jennings, chief operating officer of 13th Avenue Funding says the reason ISAs have been slow to take off is that people wrongly view it as indentured servitude even though if students’ never make the income, they never have to pay it back – unlike with a student loan.
What’s more, Jennings says that people wrongly think ISAs are only for students pursuing high-salary degrees like engineering and technology, while the students who want to become teachers or nurses will be overlooked. That may be the view of some investors but it’s not the premise of Purdue’s program. “The students applying for the Back a Boiler – ISA Fund represent a wide spectrum of majors – with no particular emphasis on any certain degrees,” notes Sequin of the Purdue Research Foundation. “We recognize that Back a Boiler is a benefit for all majors.”
Purdue’s program is available to students who will become juniors and seniors in the 2016-2017 academic year and are enrolled on a full-time basis. With the Back a Boiler—ISA Fund, the payback period will be nine years or less, with the payments adjusting based on the student’s income over the life of the contract. According to Sequin, if the student makes less income than expected, he or she doesn’t have to pay more than the agreed-upon percentage of actual income earnings over a set period. So if the expectation was that they would pay 5 percent of a $30,000 salary for nine years and they only make $20,000, the percentage is based on that lower actual income. If they earn less than $20,000, they don’t have to pay anything. And if the student earns a high income after graduation, they won’t have to worry about paying more than their fair share since Purdue Research Foundation places a cap at 2.5 times the total amount of funding the student received.
High-interest student loans more expensive than an ISA for some students
“It’s hard to believe an ISA is going to be harmful to students compared to a private loan or a Parent PLUS loan which is the alternative,” says Andrew Kelly, director of the Center on Higher Education Reform at the American Enterprise Institute. “A lot of the parent or private loans often have high interest rates, some have high origination fees and no income based protection. An ISA protects them if they don’t get a job.”
Consider this illustration offered up by Purdue Research Foundation. A rising senior who is majoring in history with an ISA contract of $10,000 and an anticipated salary of $35,000 will pay 3.97 percent of that $35,000 salary for nine years with the amount paid back coming in at $13,655. That compares with $17,124, the amount a student would pay back on a traditional loan at 9 percent interest after ten years.
Not every student is a candidate for an ISA
While ISAs and the Back a Boiler program are alternatives to taking on student loan debt, not every student is going to benefit from one of these contracts. While much of the criticism surrounding ISAs is that investors will go for the high-earning students, Kelly says more goes into it than just what degree a student is pursuing. After all, a history major at a cheap liberal arts school can do very well over their career, yielding an investor a nice return, just like an engineer from a top tech school will undoubtedly command a high salary upon graduation.
Not to mention that an ISA isn’t going to make sense for everyone. Students with the potential to earn a high salary may have no problem paying down their student loans once they graduate and therefore don’t need to enter an agreement where they are giving investors a percentage of their income. “It would not have been a good fit for Mark Zuckerberg (Facebook’s co-founder),” says Kelly. “If a student thinks he or she will do really well early on a loan is better for them.”