This week, Rep. Erik Paulsen (R-Minn.) threw his weight behind income-share agreements, or ISAs. An ISA is an agreement between a student and a private investor. The investor — a private individual or an institution, usually — agrees to pay off the student’s loan in exchange for a percentage of the student’s future earnings within a fixed period. As Paulsen explained:
“Through ISAs, students pay back a small portion of their loan depending on their income only if they are employed and receiving an income that meets a certain threshold. Rather than have to keep up with fixed, high-interest payments, which can be particularly stressful amid job uncertainty for recent graduates and pressure them to take jobs just to repay their loans, the freedom and flexibility that ISAs provide students allows them to pursue careers that put their degrees into practice.”
In other words, ISAs can help reduce risk to students by shielding them from costly loan payments immediately after graduation. In that sense, they’re similar to pay-as-you-earn or income-driven repayment plans currently available for federal student loans.
Income-share agreements are also popular because they could increase access to education. Entangled Solutions, an education think tank, found that:
“Private student loans require a substantial credit and work history, which has shown to disproportionately rule out low-income and minority students—those who need the financial support the most. To date, ISA models favor a student’s future earning potential over her past and take into account how education will change her ability to pay her obligation. This means that more students will be able to access financing, which should result in more equal access to credit and good providers.”
Plus, even if a student does get financial aid and loans, the skyrocketing cost of higher education means that traditional financing options might not cover all of the student’s costs. ISAs can help fill in the funding gaps.
Additionally, ISAs could spur educational innovation, since investors will have an incentive to support creative approaches and high standards in higher education that could increase their return on investment.
ISAs have received bipartisan support and many colleges and universities — including Purdue, MIT, and University of Illinois at Chicago — now offer ISA programs. But income-share agreements have a number of significant downsides that Paulsen neglected to mention.
Like any investment, ISAs put the investor at risk. Colleges that act as investors, for instance, might never see a return on the ISA. Even if an investor does receive repayment, it could take seven to 10 years. While big banks and financial institutions have the money to cover their operating expenses in the interim, schools might not.
Investors will also cluster around students in programs that are most likely to produce high incomes — business, management, computer science, engineering, and so on. This could disadvantage students interested in equally necessary but less lucrative liberal arts or education programs.
Another concern is that by privatizing a social good, ISAs will only lead to further reductions in public spending on colleges and universities. Since access to higher education has important positive impacts on the whole fabric of society, taxpayers and government agencies should remain invested in ensuring affordable, quality education.
Thomas Harnisch, assistant director of state relations and policy analysis at the American Association of State Colleges and Universities, has further argued that in the final analysis, ISAs don’t necessarily save students money. In a report on Pay It Forward (PIF) plans, a type of ISA, Harnisch wrote:
“Even assuming that state lawmakers maintain investments in higher education, PIF’s financial obligations could far exceed the cost of a traditional student loan simply because of the longer repayment terms. One PIF analysis revealed that graduates earning a median salary ($55,000) with annual 2 percent salary increases would pay $3,000 more than the standard 10-year loan repayment plan at 6.8 percent interest.”
Speaking before Congress on ISAs, Rep. Paulsen said, “We need to explore new ways to ensure every student has the opportunity to go to school, to develop their [skills], and then pursue their dreams without feeling deterred by the price tag. I think we need to look at a new approach.”
No argument there. But ISAs are not the only alternative approach worthy of consideration. Across much of the developed world, university education is publicly funded, making it free (or nearly free) for students. If Paulsen is looking for new ideas for expanding access to higher education, he might start the search there.
Featured image via YouTube.