The Progressive Case for Income Share Agreements
The specter of high college costs deters far too many low-income students and families away from higher education. Perhaps with good reason: over 20 percent of federal aid comes in the form of a parent co-signed loan. But few students from disadvantaged backgrounds have such a co-signer. And if they do, that low-income co-signer is on the hook for the total value of the loan. As it turns out, our loan-based system of student aid—designed to unlock the democratic promise of higher education—cares a lot more who your parents are than what your major is.
In recent months, loan alternatives, dubbed Income Share Agreements (or ISAs), have piqued the interest of policymakers and pundits bent on controlling college cost and leveling the playing field for low-income students. Purdue University’s “Back a Boiler” program, perhaps the best-known income sharing experiment, offers college juniors and seniors the opportunity to avoid private loans in exchange for a percentage of their future incomes.
It's an ironic twist, to be sure, that an idea Milton Friedman pioneered in the 1950s might undergird today’s college access agenda. Yet, a cadre of “progressive” commentators seem bent on assaulting innovation in student aid that could bolster former President Barack Obama’s goal of college for all.
The concern, the critics argue, is that colleges and investors would only offer ISAs to affluent students more likely to get good jobs. Advocates fear that colleges (or investors) won’t offer ISAs to students from low-income or working-class backgrounds because they pose more risk.
The evidence from Purdue shows they are mistaken.
We recently met Amy Wroblewski, a junior at Purdue University who grew up in Indiana. Her mom is a waitress. Her father used to paint cars.
Just months before Amy was born, her dad broke his back on the job. The family used its entire life savings while he was out of the workforce for two years. Her dad eventually found a job in the parts department but emphasized to his daughter that getting a college education was critical so she could work with her brain—not her body.
When it came time for college, Amy’s parents told her just to go to the best school she could. They would figure out a way to pay the cost. She enrolled in the business school at Purdue.
Like most students, she financed her studies through a mix of federal subsidized and unsubsidized loans along with a private loan and a small scholarship. She worked at Target. And to save costs, she lived at home her first two years. Last year, she was among the first students to participate in Purdue’s “Back a Boiler” program.
Based on Amy’s major, Purdue calculated her expected income after graduation. She was assigned a payment of 4.8 percent of her monthly income for nine years. Her maximum payment is capped and her agreement states that she will not be required to make payments if she makes too little. Her monthly payment will be around $200 to $300, whereas the monthly payment for her private loan would be $350 to $500.
“Honestly I was so excited about it,” Amy said. “I have high-interest rates on my private loans, and I wanted to get as far away from that as possible.”
This year, Amy stopped taking out loans. After graduation, she plans to work in human resources and “enjoy the journey."
She is hopeful that income share payments will be “more secure, more attainable.” Her goal is to be able to buy a house in the next 10 years as opposed to the 15 or 20 she figures it would have taken her had she continued taking out private loans.
ISAs may achieve another important aim: providing students with unprecedented transparency into the economic returns on their education investment. It’s far easier for a student with little experience in complex financial instruments to understand what five percent of income for seven years is and then compare that cost to a college that requires seven percent of income for seven years. Because there is no principal loan balance or interest to repay, ISAs also offer graduates flexibility in the selection of a career pathway. Payment obligations scale with a graduate’s ability to pay, which prevents undue burdens during times of financial hardship. It also gives graduates the ability to chose a lower paying but higher satisfaction job. From Amy’s perspective, the ISA is working just fine—and it’s a far better solution to racking up more debt.
It’s now up to colleges and the federal government to embrace ISAs and simplify the incredibly complex process of financing college. One critical next step that should attract bipartisan support would be for the federal government to provide more legal clarity for ISAs. That could, in turn, incentivize colleges to support learners not just in enrolling, but also in making good educational choices and finding—and succeeding in—good jobs.
Michael B. Horn is Chief Strategy Officer of Entangled Ventures and co-founder of the Clayton Christensen Institute for Disruptive Innovation. Daniel Pianko is co-founder and Managing Director of University Ventures Fund. Both are investors in Vemo Education, which supported Purdue University in establishing its ISA program.