With Jeb Bush’s Exit, Proponents of Income Share Agreements Look For Other Options
Posted By Derek Johnson on February 26, 2016 at 3:33 pm
When it comes to higher education, the 2016 presidential race is shaping up to be a battle of big ideas. On the Democratic side, the bitterly contested primary between former Secretary of State Hillary Clinton and Vermont Senator Bernie Sanders will determine whether the party will endorse expensive debt-free or tuition-free proposals. On the Republican side, a trio of candidates (former Florida Governor Jeb Bush, Florida Senator Marco Rubio and New Jersey Governor Chris Christie) embraced different forms of Income Share Agreements as an alternative means of funding college.
Perhaps no candidate bought into the transformative power of Income Share Agreements more than Jeb Bush. While most of his competitors offered incremental changes to the financial aid application process, loan refinancing and debt management, Bush’s plan attacked the federal aid system head-on and offered a radical set of reforms centered around Income Share Agreements (ISAs). Bush brought on two of the more prominent boosters of ISAs – Andrew Kelly of the American Enterprise Institute and Jason Delisle of the New America Foundation – as informal advisors. In January, the Bush campaign released a plan with Income Share Agreements essentially replacing federal student aid (combined with low-income Pell Grants) as the primary means of funding higher education.
“For every $10,000 spent, students would repay 1 percent of their income for 25 years. This ensures affordable repayment, removes risk of default and protects students during periods of unemployment,” wrote Bush in a post on Medium.com outlining his education plan.
And then there was one
In the wake of Bush and Christie dropping out, only Rubio remains to push Income Share Agreements on the campaign trail. Last year, he likened the current arrangement between colleges, the federal government and accreditors to a “cartel” and currently boasts in stump speeches that he is the only Republican candidate who consistently talks about student debt. He often references his own experience with large amounts of student debt and how it informs his policy views.
“I tried – early in my marriage – explaining to my wife why someone named Sallie Mae was taking $1,000 out of our bank account every month,” joked Rubio at a debate last October.
Rubio’s education plan includes Income Share Agreements, which he calls “Student Investment Plans,” as well as other reforms to accreditation, debt refinancing and the student application process. Miguel Palacios, an assistant professor of finance at Vanderbilt University who operates an ISA lending firm, believes that Rubio can be as credible a spokesperson for the cause as Bush.
“Rubio has been an advocate of ISA reform much longer than Bush (as far as I can tell). Rubio co-sponsored a bill on this topic about two years ago, and made an explicit mention of ISAs in his 2015 book,” wrote Palacios in an email exchange with GoodCall. “So in my view Rubio continues [to be], rather than becomes, a presidential candidate actively advocating legislation that enables the development of ISAs.”
There are important distinctions between Rubio’s plan and others. For example, Bush’s plan envisioned the federal government as the primary lender, with students paying back 1-2 percent of their income over the next 25 years. Rubio has called for a smaller, private sector ISA lending industry to exist side-by-side with federal student loans and has introduced legislation in the Senate to institute new regulations and consumer protections on such lenders. Rubio’s campaign did not respond to a request for comment.
Delisle, who helped craft Bush’s federal ISA plan, said that Rubio’s private ISA market would not be a suitable replacement for federal student aid. He argued that any private or nonprofit company looking to encroach on the federal market would have to be willing to go bankrupt or operate at a loss for years until the first generation of borrowers begins paying them back. Delisle stressed that a federal ISA scheme would differ substantially from a private ISA market, and are essentially two separate policies.
“What we say always is that private ISAs are a replacement for private student loans. That’s the counterfactual, that’s the benchmark,” said Delisle, later adding “I’ve never seen anybody argue we shouldn’t have student loans and just do private ISA’s.”
There are also concerns about potential market failures. The nature of ISAs (the more a graduate earns, the more he pays back) may encourage risk-averse lending. Depending on the accounting method used, the federal government either makes a small profit or loses money overall by lending to students for college. What is undeniable is that the government takes risky bets on some students in the name of the greater good. Those from low-income and minority backgrounds, liberal arts majors, mediocre students and first generation college students are on the whole less likely to graduate and will earn less, but the government prioritizes opportunity and access over profit.
Critics like Mike Konczal of the Roosevelt Institute have argued, on the other hand, that private ISAs have no incentive to contain costs, and that a lending model based on future income would offer more favorable terms to a wealthier, white male student who attended a bad school than a poor woman of color who attended a good school because that white male is still likely to earn more over the next 25 years.
“An ISA would underwrite based on the expected value of future income, full stop. Differences in postsecondary programs are a determinant of future income, but they are only a minor one. Family income, occupation, race, and gender are going to be much more important to the calculation. Pricing an ISA isn’t about finding the best school; it’s about the overall income package,” wrote Konczal on his blog.
It’s not clear where private ISA lenders would draw the line, but Palacios thinks a more robust ISA market could at least compete with the federal government on a national level. He is the author of “Investing in Human Capital: A Capital Markets Approach to Student Funding” and co-founder of Lumni, his own private ISA lender. Palacios said his company has financed higher education for approximately 7,700 students, the vast majority in Latin America where the average contract between parties is $5,000. Lumni’s foray into the U.S. market has been slower, with just 27 students financed at approximately $10,000 a pop.
“The private sector can handle the national volume to scale ISAs without a problem. The federal government would be needed only to do it quickly, but that speed would likely come at a cost: many mistakes and policy compromises that dilute the benefits of ISAs,” said Palacios.
Kevin James of the American Enterprise Institute said that while he thinks it is possible for private ISAs to play a “very large” role in student financing, it’s an open question whether they could displace federal student aid.
“It’s obviously harder – the role you can play is limited if you’re competing with federally subsidized loans. The role would be more towards filling in gaps that federal loans don’t meet,” said James.
Looking outside the presidential race
With the number of candidates supporting ISAs down to one, some supporters are looking outside of the presidential race for the way forward. Reauthorization of the Higher Education Act in Congress and continued experimentation in the private sector have been cited as two alternatives. Senator Lamar Alexander (R-TN), chairman of the Senate Health, Education, Labor and Pensions committee, praised elements of the Bush plan and called the replacement of federal student aid “innovative.” He has yet to announce whether federal or private ISAs will make their way into the Higher Education Act later this year.
Last November, the Purdue Research Foundation, a nonprofit organization tied to Purdue University, signed an agreement with private student-financier Vemo Education to explore an Income Share Agreement program. Like others, the foundation said it does not envision competing with federal loans.
“The Purdue Research Foundation program would not replace government subsidized loans, but, if viable, could offer students and their families an alternative to private education loans,” said foundation officials in a statement announcing the partnership.
James said that continued trial and error in the private sector is the best way to experiment with different models going forward.
“I wouldn’t put so much weight on the presidential race. To me, there are people out there in the world experimenting with this idea,” said James. “I think it’s a good idea and people should be trying it out and seeing if it’s something that they can offer students as an alternative, particularly to private loans.”
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