The Case for Income Share Agreements
Jeff Banks is one of the luckier people. Yes, he took out $160,000 in loans to go to college and graduate school, but some people take out more. Six months after he got his master’s Jeff had to start paying back his private loans at the clip of $350 a month—but he had a job and he could pay it. He and his wife Kelly got a gift of $18,000 from her parents to help them buy their first house. But because of that student debt, no mortgage company would give them a loan. If Jeff and Kelly save up, they may be able to buy a house in five years.
Lots of people with student loan debt have it worse. More than 44 million Americans owe on these loans for a total of $1.3 trillion in debt. The average 2016 graduate owes more than $37,000. More than 11% of students are delinquent or defaulted on their loans. Americans now owe more in student loans than they do for credit cards or auto loans, and the rate of indebtedness has gotten higher every year.
We need to think about new ways to pay for college—ways that reward hard work, follow market-based principles and avoid inflating the cost of college. One possibility is the Income Share Agreement (ISA)—an alternative to student loans where investors provide money for students’ tuitions now and receive back a fixed percentage of the students’ future income. Students who get high-paying jobs repay the investors more money—and students who end up with lower-paying jobs repay less.
The ISA is an old idea. Milton Friedman proposed it in 1955. In 2013, Oregon legislators passed “Pay It Forward,” a bill authorizing a state-funded ISA for students attending Oregon public universities—although they’re still figuring out how to fund it. In 2016, Purdue University President Mitch Daniels spearheaded Purdue’s university-run ISA—Back a Boiler. The ISA concept was also taken up by the New America Foundation and the American Enterprise Institute, who shifted the focus toward providing a national legislative framework for private-sector ISAs.
That’s what Senators Marco Rubio (R-FL) and Todd Young (R-IN) have been trying to do. They introduced bills to authorize and regulate ISAs in 2014, 2015, and now again in 2017. Senators Rubio and Young introduced the latest version of the bill in February—the Investing in Student Success Act (S. 268) (ISSA).
ISSA adds safeguards—legal maximums to how much of a student’s future income can be dedicated to repaying an ISA, and how much the student has to repay overall. It also requires ISA lenders to disclose the precise terms of the ISA and how it would compare with a fixed-rate education loan. Finally, it makes sure that students won’t get tangled in other government regulations if they use an ISA. ISA money received doesn’t count as income when students are figuring out if they’re eligible for federal education grants or loans, and students don’t have to pay income taxes for money they use to repay an ISA.
The sharpest critique of ISAs is that they’re a latter-day form of indentured servitude—and critics point to the fact that the Rubio and Young bill doesn’t allow you to declare bankruptcy on an ISA, “except in a case that would impose an undue hardship on the debtor and the dependents of the debtor.” But the “undue hardship” test applies to all attempts to declare bankruptcy on student loans. Rubio and Young’s bill is worded to put ISAs on the same footing as any other educational loan.
The National Association of Scholars recommends the Investing in Student Success Act (ISSA). ISSA doesn’t commit the government to create a new bureaucracy—it allows students and investors to come to mutually acceptable agreements, and it provides safeguards to make sure that students don’t lose their shirts.
The best test of ISAs will be what students say about them as they graduate, get jobs and start paying back their loans. That won’t be for a while—Purdue’s leading the way, and it started its program last fall with just 160 students. All we can say so far is that 160 students—responsible young adults—liked what Purdue’s ISA offered them. That’s 160 arguments so far that ISAs are a good idea.
For too long, Congress has propped up high tuition with federal loans and grants that only give incentives to colleges to raise their prices. It should pass Rubio and Young’s ISA bill as an important step toward market-based, sensible reforms.
David Randall is the Director of Communications at the National Association of Scholars.