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ISA Act Blog
7/13/16
A Cure for Mounting College Debt
Sammy Kunitz-Levy | Economics 21
Approximately 43 million people in the United States carry student loan debt and the total outstanding balance on U.S. student loans stands at $1.2 trillion. This level of debt is unsustainable, and new ways to fund higher education need to be considered. Income share agreements (ISAs) are an option that – if allowed to grow – could help many young Americans handle the cost of higher education.
First proposed by Milton Friedman in 1955, the premise of ISAs is simple: borrowers repay their loans by reimbursing investors set portions of their income over specified periods of time. If you earn more, you pay more. If you have no income, you pay nothing. The model differs from traditional loans because it shifts more risk to lenders. Investors accommodate the risk of ISAs by pooling applicants and adjusting pay periods and percentages of income.
Though their widespread use is untested, ISAs have received increased attention over the past several years. Oregon introduced the Pay It Forward program in 2013, Senator Marco Rubio (R-FL) and Representative Tom Petri (R-WI) submitted a legal outline for private ISAs in 2014, and several colleges have introduced ISA programs for their students to pay for school.Purdue University’s innovative Back a Boiler – ISA Fund, set to launch this coming school year, is a prime example. Purdue University computer science majors with ISAs will pay smaller portions of their income over shorter periods of time than philosophy students due to the disparity in their average post-college incomes. Shares of income collected will be small, between three percent and five percent. Purdue has also set limits on the maximum amount of total income that can be collected, at 2.5 times the initial amount loaned.
Pooling applicants to mitigate risk is a central concept of ISAs. For example, if one applicant does not make enough money over the next ten years to cover the cost of the initial loan, another student from the pool with a higher salary will be able to offset the shortcomings of the first student’s income. If the entire pool underperforms, the lending source can raise rates or lengthen the repayment period for future agreements. Gathering data is essential to this process, and 21st century technology makes doing so possible.
ISAs’ most prominent flaw is adverse selection. Students expecting to earn high incomes would avoid ISAs, whereas students expecting to earn lower incomes might gravitate towards ISAs. This would cause the expected returns for investors to be lower. Students expecting high incomes would be even more likely to choose traditional loans over ISAs because the government makes federal student loans at a loss, and on more favorable terms, than private ISA lenders could provide.
Some have called ISAs “indentured servitude.” But the “indentured servitude” metaphor pretends that traditional student loans are innocuous. In reality, students cannot escape most traditional loans even if they have no jobs or do not graduate, whereas students graduating with ISAs have more flexibility. ISAs’ biggest draw is that they will not ruin students’ lives by dragging them down into debt spirals.
ISAs bring to mind a different question for some self-assured college students: What happens when you create the next Facebook? Would you needlessly give away your hard earned income? For example, imagine Mark Zuckerberg went to Purdue, needed financial aid, and took out an ISA.
For starters, Zuckerberg would be better off opting for an ISA rather than a student loan because he carries little risk of defaulting on the ISA, even though he dropped out of school to start his own business. Indeed, student loans hit college dropouts harder than any other segment of borrowers.
Purdue University’s rule that ISAs can only collect 2.5 times the initial amount loaned to students is critical to this example. Because Facebook’s popularity skyrocketed in the first couple years, Zuckerberg’s income would likely have been much larger than a typical student’s.
With the ISA collecting between 3 percent and 5 percent of his income, it is likely that Zuckerberg would have returned the maximum amount, at 2.5 times the initial sum invested, in the first two years of running Facebook. In this example, Zuckerberg would be free of his ISA within a year or two, and the extra revenue made from his ISA would be recycled back into the system to be made available for future students.
This anecdote has two important takeaways. First, ISAs can and should be subject to rules, such as capping total payments to colleges at 2.5 times the principal. Second, ISAs will mitigate risk for students who decide to pursue bold and innovative ideas without the burden of a fixed-sum debt obligation.
Government action and legal progress will determine the future for ISAs. The government should overhaul the current income-based repayment process and spearhead ISAs’ gradual implementation at a federal level. Another option is for the government to establish legal frameworks that encourage the private sector to lead the charge. In the absence of both of these developments, colleges themselves will develop ISA programs.
Income share agreements are not an instant panacea for America’s damaged higher education financing system. But, given time and attention, they could become a viable and common option for many students.
6/22/16
Purdue's 'Back-a-Boiler' program up and running
Chelsea Schneider | The Indy Star
For two years, Amy Wroblewski has financed college with high-interest private loans, but next year, the Purdue University junior is part of an experiment the college is undertaking to combat student debt.To cover the cost of her degree, Wroblewski, 20, will promise to pay a share of her future earnings to Purdue for nine years after she graduates. It’s a program Purdue President Mitch Daniels, a former Indiana governor, has coined “Back-a-Boiler.”Purdue is enrolling the first round of students in the program, making the university the biggest player in the nation to try the novel concept. Students enter into income-share agreements rather than taking out a traditional college loan. As Daniels puts it, the program amounts to “working your way through college, after college,” though a leading Purdue faculty member worries the agreements aren’t a good deal.Daniels and other school leaders say the program could one day become a nationwide alternative to student loan debt that in Indiana is estimated at more than $29,000 per college graduate.If it works.And that’s the question Purdue is starting to figure out this fall.Already the college has enrolled more than 120 students, providing upward of $2.2 million in aid for the 2016-17 school year.For Wroblewski, the program means she can forgo taking out another private loan where she’s seen interest rates as high as 9.8 percent. Instead, the management major expects to pay about $127 per month through her income-share agreement, and that cost could go down if she has issues securing a job.The payment plan takes the stress off of affording college, she said.“It’s very daunting,” Wroblewski said of her loan debt. “I knew this was going to be a burden on myself and my parents. I just knew I have to get my degree. I have to get a really good job after college, or I cannot pay for my college. I was in just a lot of pressure.”Here’s how it’s designed: The college sets the repayment amount based on the anticipated earnings of a student’s area of study, with the goal of not exceeding 10 percent of a graduate’s income. As opposed, to the only other option some students face – a private loan where interest can start accruing immediately. If a student is unsuccessful, or doesn’t earn what they anticipated, monthly payments under “Back-a-Boiler” would go down.“I always point out to people that it shifts the risk that things work out, or won’t work out quickly, from the student to somebody else, mainly the investor,” Daniels said.To front the cost of educating those students, the college plans to seek out investors. For now, the Purdue Research Foundation has provided the first $5 million. The hope is students will pay back what they received, plus a little bit more to keep the program running.So far interest from students in wanting to join “Back-a-Boiler” has exceeded college officials’ expectations.“We’re out to learn here,” Daniels said. “I’ve been trying to be cautious and low key about this.”Daniels: ‘Away we went’The story of how Purdue came to offer this type of income-share program started last year when Daniels testified in front of Congress.He was trying to make the point that “federal red tape” gets in the way of innovation in higher education. Income-share agreements, an idea born out of economist Milton Friedman, was the last of the examples he cited.“I immediately began hearing from people who were floating around out there very interested in this idea, and no one had been willing to try it,” Daniels said.Daniels, who as a two-term governor was known for not shying away from novel or untried ideas, said an innocent comment on a broader subject made him discover the potential draw of the financial aid concept. He heard from people in academe and from those who were putting startup businesses together to make income-share agreements work. And he heard from people preparing to raise money in case there came a place to invest it.“And away we went,” he said.Ted Malone, Purdue’s financial aid chief, admits he was skeptical at first, almost envisioning a shark tank where a student stands in front of a bunch of rich people and them saying “well, I’ll give you this for that.”“But the way we have it set up, it’s not going to be based on personality. It’s simply based on a first come, first serve to qualified students. We’re not giving any preferences to engineers over the college of education, nor vice versa. We’re looking at every student who applies and looking at them for their potential,” Malone said.Now the college is focused on whether “Back-a-Boiler” can become self-sustaining and estimates up to 400 students could be part of the initial group. Nearly 70 majors are currently represented in the pool of students enrolled in the program.But income-share agreements might not be the right fit for all students, said Robert Kelchen, a higher education professor at Seton Hall University. He argued the program is a trade-off between the safety of having payments tied to income, and the risk of a student repaying more if they earn a higher salary. The system also could collapse if only lower-earning graduates use it.“It shows that Purdue believes in its students enough to think they will do well and that Purdue will get its money back. The real question is who ends up picking up these (agreements,)” Kelchen said.Some critics of the idea describe the agreements as “indentured servitude,” and say new income-based repayments for federal loans could be a better option for students.David Sanders, chair of the University Senate that represents faculty members at Purdue, said he’s concerned about the structure of the program.“With a loan you know how much it is going to cost you within a certain amount of time,” Sanders said. “Students don’t know that with these income-share agreements. It’s quite difficult for them to a make a reasonable calculation about loan vs. income-share agreement.”With the college’s foundation covering the initial cost, Daniels anticipates alumni also will be willing to invest.“But if it’s going to be a genuine large-scale alternative to student debt on a national level, you’re going to have also a lot of investors who just see it as a smart thing to do,” Daniels said.Daniels shrugged off criticism of the program.“In fact, the indentured servitude is the student debt of today – that is indentured servitude,” Daniels said. “In an (income-share agreement) the student is totally free, they don’t have to work at all. If they don’t, they just walk, and it’s the investor who loses.”The bipartisan support income-share agreements have received helped cement Daniels' interest in carrying out the concept.“We need more ideas like that, he said.Beth Akers, a fellow at the Brookings Institution, has said while the agreements “may not be the silver bullet that will solve all of our collective concerns” they have a place in higher education.Separately, the Center on Higher Education Reform concluded the agreements “would provide students with funding based on their potential to be successful in a particular program, not based on their family’s economic circumstances or the presence of a co-signer. Therefore, students of all backgrounds can get the financing they need for programs that are worthwhile.”As for Wroblewski, she thinks “Back-a-Boiler” is the smarter way to go. She expects students will choose Purdue over other colleges because it offers the financial aid option.“It’s really working with how you are living and everything,” she said. “It’s more personalized.”3/18/16
A new spin on college financing? Treating students like stocks
Laura Pappano | PBS NewsHour
What’s the market read on Karla Comacho? Not the potential value of the Frida Kahlo-like portraits she creates, but the potential return on her.
Is this studio art major at California State University, Long Beach a good risk? Some deep-pocketed Wall Street-savvy investors think so.
They’re also bullish on Ulises Serrano, a University of California, Berkeley senior and son of a migrant worker. Ditto nine other low-income California college students to whom they’ve fronted about $15,000 each in exchange for a piece of their future incomes.
Treating students like stocks is the idea behind an emerging kind of financial aid called income-share agreements, or ISAs. Under the concept, students get money from investors and they agree to pay a percentage of their future income to those investors over a set period of time.
Given worrisome student loan debt — now $1.23 trillion — ISAs offer a new spin on college financing. Or new-ish. They have been used for years in Latin America. In the United States, they have long fascinated politicians and policy wonks, but with no record of returns or clarifying legislation, they have failed to attract investors.
That may be about to change. In what would be the first big test here, Purdue University will decide next month if it will go ahead with a plan that could have 100 to 200 students adding ISAs to their financial aid packages this fall. There are no final details yet of the pilot “Back a Boiler” program, named after the school’s Boilermakers nickname (the cheeky original name, “Bet on a Boiler,” has been changed). But students who choose to accept ISAs could get up to $10,000 or $15,000 each for tuition, room, board, and expenses, in exchange for a portion of their postgraduate earnings.
“The real attraction to me is they might be a fairer and better option for some subset of our students,” said Mitch Daniels, Purdue’s president, who last spring spurred buzz by raising ISAs in testimony before a congressional committee.
What ISAs offer is insurance. If students earn less than, say $20,000 a year, they pay nothing. And when the repayment period, which may run 10-20 years and is set at the outset, ends, they walk away. That’s a buffer against problems borrowers face with loans, which continue to compound even under income-based repayments or deferments.
The downside? If students make a lot of money, they end up paying out more than was invested in them, and more than a loan would have cost. But then the investors win.
The Purdue pilot would be small, likely seeded with up to about $3 million from the Purdue Research Foundation. But Brian E. Edelman, the foundation’s chief financial officer, hopes it goes big. “We would love for income-share agreements to scale at the national level,” he said.
That would take billions of dollars, pools of students, and investors who see a worthy opportunity. Some already do.
“That’s not a bad piece of paper to own,” mused Casey Jennings, a cofounder of 13th Avenue Funding, a California-based not-for-profit that is advising Purdue: “’I own GE, Ford, Apple, and yeah, I have this weird piece of paper that’s students at Purdue.’”
“We have a whole bunch of students who don’t go to college because they don’t want to borrow.” Casey Jennings, cofounder of 13th Avenue FundingIt’s 13th Avenue that has invested in those California students, as part of a small pilot of its own that’s more philanthropic than profit-motivated.
“I saw that we have a whole bunch of students who don’t go to college because they don’t want to borrow,” said Jennings, a former managing partner at GE Capital who with co-investors Robert M. Whelan, Jr. and Ed Lowry put up $165,000 to see if ISAs could help low-income students earn degrees.
The team offered ISAs in 2012 to four students at the two-year Allan Hancock College in Santa Maria, California, who planned to go on to earn bachelor’s degrees. The next year, 24 students applied; 13th Avenue funded seven.
The students get up to $15,000 each, and agree to pay back up to 5 percent of their income for up to 15 years; when the total original outlay for the entire cohort of students has been recouped, everyone stops paying.
There’s still individual risk. “On a pool basis the interest rate will look like 0 percent,” because as a group students pay to reseed the original investment, said Jennings. Because recipients’ incomes vary, “some will pay a lot; some will pay less.”
Most surprising to Lowry, who disperses the money when it’s needed, is how critical cash is to these students — for rent, for car repairs, to replace crashed laptops. “It shocked all of us,” he said. “We thought all they needed was money for tuition.”
A few years ago, Corynn Wolfe found the tires slashed on the black Mazda she used to get to class at California Polytechnic State University in San Luis Obispo.
“I had $115 in my account and that was my money for the next two weeks,” said Wolfe, 25, a single mother of a 6-year-old. “I want to go to school to make a better life, but I can’t do that if my daughter doesn’t have daycare or my car isn’t working or my rent isn’t paid.” She contacted Lowry and got $275 to replace the tires.
Wolfe, who took out $20,000 in federal loans and got another $15,000 from her ISA, graduated on December 12, a Friday. After a grand party — her aunt made orange chicken, chow mein and fried wontons — she started work on the following Monday making $42,000 as a human resource manager for a home health agency.
“Without their help,” she said, of 13th Avenue, “I would not have been able to finish the way I did.”
Wolfe hasn’t started her repayments yet, but five percent of her income is $2,100 a year, or $31,500 over 15 years. That’s more than double what was invested in her.
If group members earn higher incomes the original investment is reseeded faster, she said, and “If enough of us do well, we’ll pay back less.”
If she pays more? “I feel better knowing someone else can have the same chance.”
Other students in the 13th Avenue experiment agreed, from Engels Garcia, now a San Jose State University graduate looking at law school, to Serrano, the Berkeley senior whose father picked strawberries, broccoli and cauliflower.
“At the end of the day, I don’t mind,” Serrano said.
Comacho, the art student, sought the ISA because loans make her nervous. The youngest of six from what she describes as “an agriculture-slash-farmer” background, she has no financial safety net. She’s watched “friends who graduated with $35,000 in debt and they can’t find a job.” Meanwhile, she said, “interest is adding up.”
Still, the idea of investors wagering on students is a tough image to get used to, said Ted Malone, director of financial aid at Purdue, who first pictured ISAs as being peddled by hucksters “walking up to our students and saying, ‘Buddy, I got a deal for you,’” he recalled. “I was skeptical.”
But Malone also worries about students in what he calls “the doughnut.” Those with family incomes of $50,000 to $125,000 can’t get grants but can’t write big checks for $10,000 either, he said. By the time they’re seniors, some have exhausted their allowance of low-interest loans. “What they tend to do is put [the rest] on a credit card or work astronomical hours,” Malone said. Some take expensive private loans. Some drop out.
Students who have seen parents lose low-wage jobs may find comfort in the security that ISAs offer — that the obligation is suspended when troubles arise that lower their income below the repayment threshold. That’s especially true for those who choose careers with unpredictable payoffs.
“The high-income fields are not necessarily the ones this will attract,” said Miguel Palacios, a finance professor at Vanderbilt who co-founded a company called Lumni that has offered ISA’s since 2002 in Latin America where students have few funding options and is now beginning to invest in the United States. “It will not be for MBAs or doctors or dentists. Those fields have relatively safe and high future income paths.”
For ISAs to be viable here, Palacios said, there needs to be expected returns of at least 6 or 7 percent, plus laws or court rulings that remove uncertainty for investors.
Without those, ISAs have so far made few inroads. Lumni, for example, has funded 7,700 students in Latin America using ISAs, but only 27 in the United States.
Also, unlike in Latin America, where Lumni’s average ISA of $5,197 covers most college costs, Palacios predicted, “in the U.S., ISAs will likely be gap funding.”
Until they become more widely known, it won’t be possible to see if ISAs will help those needing a leg up, or prey on them.
What’s clear is that high-cost loans are a serious and escalating burden.
Last year, Malone said, 3,961 Purdue undergrads took out $63.3 million in private and Parent PLUS loans. Median private loan debt for the university’s Class of 2015 was $14,884 for Indiana residents and $35,000 for non-residents; median PLUS debt, with which their parents are often stuck, was $22,690 and $71,569. And those amounts don’t include subsidized and unsubsidized federal loans.
Purdue ISAs will have the goal of helping to reduce these loan debts, said Michael Stynes, executive director of the Jain Family Institute, who is also advising Purdue. Part of that, he said, “will be doing the math correctly.”
For some critics, however, the math is exactly the problem. Purdue will lower student risk by capping the cost of the ISA at what a loan would cost (Malone said an online calculator will let students judge). But unlike loans with terms tied to creditworthiness, ISAs predict incomes. Which is where it gets touchy: How do you price a student?
To figure that out, Purdue has contracted with Vemo Education, a Reston, Virginia, company started last year.
“We don’t price people individually; we price across pools,” said Tonio DeSorrento, the company’s CEO. “If you had one group of people in a subgroup who will earn $60,000 and another earning $40,000,” he said, “one will pay a lower percentage of income with the aim of getting the same dollar-on-dollar return.”
Translation: If risk pools are constructed by major, engineers will pay a lower percentage of their income than theater majors because they’re expected to earn more.
Such distinctions are a reality, said Daniels, the Purdue president. “The minute they walk out the door of this university they will be treated differently.”
But this framing pokes at tensions over the purpose of college and puts dollar values on majors, said David Sanders, vice chair of the Purdue Faculty Senate and professor of biological sciences.
“We are telling people that if you go into the humanities it will cost you more than your fellow students,” Sanders said. Students, he said, “should be able to come to Purdue and pursue their own interests and their own dreams.”
So are students ready for ISAs? Just before Halloween, Sheriff Almakki, a member of Purdue’s student government, sat in a second floor conference room with a view of the recreation center as Purdue officials and advisers, including Jennings and Lowry from 13th Avenue, pitched ISAs to a focus group. Almakki, a double major in biochemistry and math, said he prefers to know costs up front. “With the income percentage,” he said, “you don’t know how much you are losing out on.”
But more than the dollars, he struggles with the concept: “The concern I had then and the concern I have now is that we are making higher education into more and more of a business model,” Almakki said.
That doesn’t faze fellow student-government member Miranda Campbell, a junior majoring in theater design and production.
“Students do need more options,” Campbell said. But ISAs “are a short-term Band-aide solution.”
Campbell said she wants leaders tackling what she said is the far more critical issue:
“I am in favor,” she said, “of finding a way of having higher education not cost so much.”
This story was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education.
1/12/16
Higher Education Debt Is Worth It, But Isn't Risk Free
By Beth Akers | Real Clear Markets
The public discussion about higher education has long been focused on two obvious trends: the rising cost of college, and the growing burden of student debt. These are certainly important factors for consumers, college administrators and policymakers to consider, but the emphasis on these points has caused us to collectively overlook another critically important factor: risk. The real solutions to the problems that plague our nation's system of higher education will come when policymakers shift their focus to address the systemic risk inherent in investing in a college degree.Over the last 20 years, published tuition and fees have more than doubled at four-year public institutions, and have increased by more than 50 percent at private four-year and public two-year colleges. This rate of increase has not been seen in any other sector of the economy. Some of this is mitigated by the fact that schools have increased grant aid at the same time, but there is no question that the cost of college is trending steadily upward(even after accounting for inflation).But the rapidly rising cost of college education is not as troubling as it first appears. While the price of higher education has increased, so has its value. Over the last 30 years the lifetime earnings associated with having a college degree hasgrown by 75 percent. Today's students are paying more to go to college, but they are also getting more out of it. In this sense they're getting a better deal.We've also seen a dramatic rise in education debt in recent years. There is more outstanding student debt today than ever before. The fraction of households holding student loans is continually increasing and the balances of their loans are increasing as well. This trend is worth noting, but we shouldn't neglect to consider this in the context of the financial return to education. Spending on college, even if it is financed with debt, generally leaves a student better off. Research indicates that the financial rate of return on a college degree is about 15 percent - a rate that far exceeds the yield on most other investments available to the individual consumers, especially young ones. This is why many across the nation, including President Obama, are working hard to increase the rate of college enrollment, particularly among disadvantaged students.It's absolutely true that college is still "worth it," but this narrative misses an important nuance that needs to become a bigger part of the discussion. Going to college is risky. The financial returns to college degrees are large on average, but students face a range of outcomes. Even if the majority of students face favorable returns on their investments in higher education, that still leaves some who would have been better off without having enrolled in the first place. As the cost of college has risen, so has the cost of making a losing bet on a degree.There are many forms of risk facing students as they consider enrolling in higher education. One common pitfall is failing to complete a degree. Among the cohort of first-time, full-time students entering four-year degree programs in 2005, only about 60 percentultimately graduated. This often unforeseeable outcome leaves students with the expense of college, but without the earning power associated with holding a degree. Even students who complete their degree are not guaranteed a payoff on their investment. Some students will realize, in retrospect, that the earnings opportunities afforded by their degree do not justify the cost. For example, new research has shown that many students who attended for-profit colleges in recent years are facing poor financial outcomes. In essence, these students took bets that didn't pay off.In the existing federal student loan program, borrowers are protected from unaffordable monthly payments on their debt through a set of repayment programs that cap monthly payments based on income. However, these programs are difficult to navigate, and don't always deliver relief where (or when) it is needed most. A more streamlined and robust program of income-driven repayment could go farther in protecting students from risk, but private market solutions, like income share agreements, and institution level innovations can also play a role in addressing this problem.The problem of risk in higher education will be a challenge to solve, but practical solutions are not inconceivable. The challenge, instead, is getting the issue of risk to become an important part of the national discussion about higher education reform. We're all implicitly aware of the notion of risk, but it's time to bring it to the forefront of the discussion.11/28/15
Purdue to try student income-shares
Danielle Douglas-Gabriel | Washington Post
If college is an investment, students don’t have to be the only ones reaping the returns – or, for that matter, taking on the risks.In one novel alternative to private student loans, investors could front students the money to pay for college in exchange for a percentage of their future earnings.But what are the dangers to students who accept these so-called income-share agreements? Who would benefit the most?This week, Purdue University took a step toward answering some of those questions by partnering with Vemo Education, a financial services firm in Virginia, to explore the use of income-share agreements, or ISAs, to help students pay for college.Through its research foundation, the school plans to create ISA funds that its students can tap to pay for tuition, room and board. In return, students would pay a percentage of their earnings after graduation for a set number of years, replenishing the fund for future investments. Purdue is relying on Vemo, along with nonprofits 13th Avenue Funding and the Jain Family Institute, to flesh out the terms.There’s nothing new about ISAs. Economist Milton Friedman floated the idea in the 1950s, and a handful of Latin American countries use the agreements. Yet they have been slow to catch on in the United States. A handful of small companies and nonprofits, including Cumulus Funding and 13th Avenue, are piloting programs or offering contracts on a limited basis, but the market is in its infancy.Last year, Sen. Marco Rubio, R-Fla., and Rep. Tom Petri, R-Wis., introduced legislation to create a legal framework for ISAs that set the maximum length of a contract at 30 years, capped income at 15 percent and stated that the agreements are not loans. The bill stalled in committee but brought attention to the nascent market.Purdue President Mitch Daniels, former governor of Indiana, championed income- ;share agreements in a recent Washington Post op-ed, calling the contracts “a constructive addition to today’s government loan programs and perhaps the only option for students and families who have low credit ratings and extra financial need.”He wrote:“From the student’s standpoint, ISAs assure a manageable payback amount, never more than the agreed portion of their incomes. … Best of all, they shift the risk of career shortcomings from student to investor: If the graduate earns less than expected, it is the investors who are disappointed; if the student decides to go off to find himself in Nepal instead of working, the loss is entirely on the funding providers, who will presumably price that risk accordingly when offering their terms. This is true ‘debt-free’ college.”Is it really? Income shares certainly don’t function like traditional debt in that there is no explicit principal balance or interest. And the repayment terms are in many ways more flexible than even the most generous of the government’s income-based repayment plans.Still, ISAs are debt in the sense that they obligate students to essentially repay a portion of the investment. And depending on a graduate’s earnings, an ISA could become an expensive way to finance an education.Say a student agrees to pay 5 percent of her income for five years on a $10,000 agreement. If she lands a $60,000 job after graduation, she could pay $15,000 by the time the contract is up, more if she gets raises along the way. Yet if that same graduate loses her job during that time, she would not be forced to find the money to pay.Either way, students would have to be informed about the earning potential in their field before signing up. Some observers worry that students pursuing profitable degrees in engineering or business would get better repayment terms than those studying to become nurses or teachers.But there are ways to avoid that sort of adverse selection, says Tonio DeSorrento, chief executive at Vemo.“It’s easier to scale (the agreements) and meet both investors’ and students’ needs if you fund people in groups,” said DeSorrento, who co-authored a paper on ISAs with Andrew Kelly at the American Enterprise Institute.By pooling agreements, investors could hedge against graduates who might wind up with low earnings or lose their job, he said. Agreements could also be grouped by field of study or other characteristics, so students are judged relative to their peers.And student protections? That’s a little fuzzy. It would be up to policymakers and regulators, such as the Consumer Financial Protection Bureau, to determine which consumer protection laws would be applicable to an ISA. Since the agreements aren’t exactly loans, it’s unclear whether they’d be subject to laws such as the Fair Credit Reporting Act, for instance.All of the uncertainty surrounding ISAs – and all of the potential – is what makes the Purdue experiment so interesting. The structure of and demand for the program could encourage other universities to sponsor their own funds.11/28/15
Purdue to try student income-shares
Danielle Douglas-Gabriel | Washington Post
If college is an investment, students don’t have to be the only ones reaping the returns – or, for that matter, taking on the risks.In one novel alternative to private student loans, investors could front students the money to pay for college in exchange for a percentage of their future earnings.But what are the dangers to students who accept these so-called income-share agreements? Who would benefit the most?This week, Purdue University took a step toward answering some of those questions by partnering with Vemo Education, a financial services firm in Virginia, to explore the use of income-share agreements, or ISAs, to help students pay for college.Through its research foundation, the school plans to create ISA funds that its students can tap to pay for tuition, room and board. In return, students would pay a percentage of their earnings after graduation for a set number of years, replenishing the fund for future investments. Purdue is relying on Vemo, along with nonprofits 13th Avenue Funding and the Jain Family Institute, to flesh out the terms.There’s nothing new about ISAs. Economist Milton Friedman floated the idea in the 1950s, and a handful of Latin American countries use the agreements. Yet they have been slow to catch on in the United States. A handful of small companies and nonprofits, including Cumulus Funding and 13th Avenue, are piloting programs or offering contracts on a limited basis, but the market is in its infancy.Last year, Sen. Marco Rubio, R-Fla., and Rep. Tom Petri, R-Wis., introduced legislation to create a legal framework for ISAs that set the maximum length of a contract at 30 years, capped income at 15 percent and stated that the agreements are not loans. The bill stalled in committee but brought attention to the nascent market.Purdue President Mitch Daniels, former governor of Indiana, championed income- ;share agreements in a recent Washington Post op-ed, calling the contracts “a constructive addition to today’s government loan programs and perhaps the only option for students and families who have low credit ratings and extra financial need.”He wrote:“From the student’s standpoint, ISAs assure a manageable payback amount, never more than the agreed portion of their incomes. … Best of all, they shift the risk of career shortcomings from student to investor: If the graduate earns less than expected, it is the investors who are disappointed; if the student decides to go off to find himself in Nepal instead of working, the loss is entirely on the funding providers, who will presumably price that risk accordingly when offering their terms. This is true ‘debt-free’ college.”Is it really? Income shares certainly don’t function like traditional debt in that there is no explicit principal balance or interest. And the repayment terms are in many ways more flexible than even the most generous of the government’s income-based repayment plans.Still, ISAs are debt in the sense that they obligate students to essentially repay a portion of the investment. And depending on a graduate’s earnings, an ISA could become an expensive way to finance an education.Say a student agrees to pay 5 percent of her income for five years on a $10,000 agreement. If she lands a $60,000 job after graduation, she could pay $15,000 by the time the contract is up, more if she gets raises along the way. Yet if that same graduate loses her job during that time, she would not be forced to find the money to pay.Either way, students would have to be informed about the earning potential in their field before signing up. Some observers worry that students pursuing profitable degrees in engineering or business would get better repayment terms than those studying to become nurses or teachers.But there are ways to avoid that sort of adverse selection, says Tonio DeSorrento, chief executive at Vemo.“It’s easier to scale (the agreements) and meet both investors’ and students’ needs if you fund people in groups,” said DeSorrento, who co-authored a paper on ISAs with Andrew Kelly at the American Enterprise Institute.By pooling agreements, investors could hedge against graduates who might wind up with low earnings or lose their job, he said. Agreements could also be grouped by field of study or other characteristics, so students are judged relative to their peers.And student protections? That’s a little fuzzy. It would be up to policymakers and regulators, such as the Consumer Financial Protection Bureau, to determine which consumer protection laws would be applicable to an ISA. Since the agreements aren’t exactly loans, it’s unclear whether they’d be subject to laws such as the Fair Credit Reporting Act, for instance.All of the uncertainty surrounding ISAs – and all of the potential – is what makes the Purdue experiment so interesting. The structure of and demand for the program could encourage other universities to sponsor their own funds.10/27/15
Purdue Income Share Agreements could cost students how much?
10/26/15
Lower the risk of investing in college with Income Share Agreements
College tuition is high, but degrees are stillCollege tuition is high, but degrees are still worth it. Debt is growing, but the largest debts are held by people with the highest income. So what’s the problem? The really troubling trend is the growing riskassociated with investing in higher education.Beth Akers | The Brookings Institute
Paying for college: A riskier investmentHistorically, making a bad investment in higher education was not a catastrophe. Wasting tuition dollars on a degree that didn’t pay off was like buying a car that turned out to be a lemon. There were financial consequences, but they weren’t ruinous. That has changed. The high price tag of higher education means that investing in a college degree means putting all (or at least many) of your eggs in one basket. Degrees still pay large dividends for the typical student, but there are many who will sink dollars into a degree that will see little or no return.Insurance against downside riskWhat can be done? The main response must be to help students to insure themselves against bad outcomes. Income-driven repayment plans, which have been expanded in the past few years, help students who use federal loans. But students who take on private loans to supplement federal borrowing are not protected in the same way. Borrowers who use private loans to finance their education are in the vulnerable position of investing large amounts of their wealth in a single, risky asset (i.e. their education). (Recent work from the Hamilton Project and Brookings Papers on Economic Activity show how widely the returns to college can vary.)A private sector solution: Income-sharingUntil now, tools for mitigating this risk have not been widely available. But that might soon change. This summer, Purdue University announced that they will begin making Income Share Agreements (ISA) available to their students, perhaps as soon as this spring. There is also growing congressional interest in legislation to create a legal and regulatory framework to support a market for ISAs.Income Share Agreements are an innovative tool that will, as I have argued elsewhere, allow students to finance college by selling “shares” in their future earnings. Graduates pay back in proportion to the pecuniary value they get from their degree. If the degree proves worthless, the students will pay little or nothing. If the degree is immensely valuable, then the students will pay back a lot. Either way, the payments are, by construction, affordable.Private education loans put borrowers on a sharp financial hook, whether they can afford it or not. These loans are difficult to discharge in bankruptcy, making a risky situation even riskier. The typical borrower will do just fine repaying their private loans; but the borrower who gets a raw deal from their education will face serious consequences. As always, the devil is in the details. But with careful implementation, Income Share Agreements have the potential to patch this hole in the safety net for students investing in higher education. worth it. Debt is growing, but the largest debts are held by people with the highest income. So what’s the problem? The really troubling trend is the growing riskassociated with investing in higher education.Paying for college: A riskier investmentHistorically, making a bad investment in higher education was not a catastrophe. Wasting tuition dollars on a degree that didn’t pay off was like buying a car that turned out to be a lemon. There were financial consequences, but they weren’t ruinous. That has changed. The high price tag of higher education means that investing in a college degree means putting all (or at least many) of your eggs in one basket. Degrees still pay large dividends for the typical student, but there are many who will sink dollars into a degree that will see little or no return.Insurance against downside riskWhat can be done? The main response must be to help students to insure themselves against bad outcomes. Income-driven repayment plans, which have been expanded in the past few years, help students who use federal loans. But students who take on private loans to supplement federal borrowing are not protected in the same way. Borrowers who use private loans to finance their education are in the vulnerable position of investing large amounts of their wealth in a single, risky asset (i.e. their education). (Recent work from the Hamilton Project and Brookings Papers on Economic Activity show how widely the returns to college can vary.)A private sector solution: Income-sharingUntil now, tools for mitigating this risk have not been widely available. But that might soon change. This summer, Purdue University announced that they will begin making Income Share Agreements (ISA) available to their students, perhaps as soon as this spring. There is also growing congressional interest in legislation to create a legal and regulatory framework to support a market for ISAs.Income Share Agreements are an innovative tool that will, as I have argued elsewhere, allow students to finance college by selling “shares” in their future earnings. Graduates pay back in proportion to the pecuniary value they get from their degree. If the degree proves worthless, the students will pay little or nothing. If the degree is immensely valuable, then the students will pay back a lot. Either way, the payments are, by construction, affordable.Private education loans put borrowers on a sharp financial hook, whether they can afford it or not. These loans are difficult to discharge in bankruptcy, making a risky situation even riskier. The typical borrower will do just fine repaying their private loans; but the borrower who gets a raw deal from their education will face serious consequences. As always, the devil is in the details. But with careful implementation, Income Share Agreements have the potential to patch this hole in the safety net for students investing in higher education.10/1/15
Young's ISA Bill Subject of Capitol Hill Hearing Featuring Former Governor Daniels
Press Release | Rep. Todd Young
In July, Congressman Young’s years-long effort to craft legislation that would provide students access to an innovative higher education financing tool, called an Income Share Agreement (ISA), culminated in the introduction of his Investing in Student Access Act (or the ISA Act).Upon introduction of his bill, Young noted that the class of 2015 will of graduated with the most loan debt in United States’ history, and he reiterated that student loan debt is likely the next bubble to burst.“Not enough is begin done to address the affordability problem,” Youngargued. “That’s why I crafted this ISA bill—because we’re in dire need of a real market-driven solution that’s not only good for students, but good for American taxpayers whose tax dollars aren’t involved and at risk.”While ISAs are not a new idea, Young’s legislation provides the legal certainty investors needed for the tool to be implemented on a larger scale.The bill clarifies the tax treatment for both the student at the front and back end of the agreement. And maybe most importantly, it puts in place robust consumer protections for students.Since the introduction of Young’s ISA Act of 2015, dozens of thought-pieces have been penned discussing the financing tool, from articles in the Wall Street Journal, to the Washington Post, and Forbes.On Wednesday, September 30th, former Governor of Indiana and current Purdue President Mitch Daniels testified before the Joint Economic Committee, wherein he discussed what has been dubbed “The Indiana Experiment”– formally known as the Bet On A Boiler program being piloted at Purdue University in West Lafayette, Indiana.Purdue’s Bet On A Boiler program is the first of its kind. The university has partnered with private firms that will manage income share portfolios in order to provide students the choice to cover all or a portion of their tuition through an ISA.In the Wednesday hearing, university President Mitch Daniels said of the innovative ISA idea: “You want debt-free education, here it is.”To listen to or download PresidentDaniels’ opening statement, click here. A portion of his opening statement from the hearing is below:“Many of us believe that some new approaches are in order, and to center on the one we were invited to talk about, so called Income Share Agreements.”“We see them not as a panacea, but as an important addition to the portfolio—maybe a replacement for PLUS and most private loans, which I quite agree are the biggest locus of the problem we have.“They [ISAs] shift the risk from the student to the investor. Not the lender—but the investor.“They provide limits and they provide some certainty to the obligation that a graduate will have. They would know that never more than an agreed upon, negotiated, freely-chosen percentage of their future income in any given year would go to pay back the investor.“You want debt-free education, here it is.“So we want to thank Congressman Young, Congressman Polis for this bipartisan House initiative. And I’m very encouraged to hear that is has some prospects.”For more details about the ISA Act and Income Share Agreements, visit Congressman Young’s ISA blog.10/1/15
Purdue President Mitch Daniels explains new student loan program to members of Congress
By Maureen Groppe | The Indianapolis Star
Members of Congress had multiple questions Wednesday about the income share agreements Purdue University President Mitch Daniels hopes to offer as an alternative to traditional student loans.Would students from disadvantaged backgrounds be able to attract the investors who will pay for their degree in exchange for a share of future income?Why should students with income share agreements be able to discharge them by filing for bankruptcy when they can't do that with traditional student loans?Could the program serve as a guide to students about what degrees are most in demand in the marketplace?"It's refreshing to talk about some new ideas, some new solutions," Rep. Erik Paulsen, R-Minn., told Daniels at a hearing of the Joint Economic Committee.Sen. Dan Coats, the Indiana Republican who chairs the committee, had invited Daniels to testify about the challenges of paying for higher education and about potential alternatives.New York Rep. Carolyn Maloney, the panel's top-ranking Democrat, noted at the start of the hearing that student loan debt is almost twice as large as credit card debt.Daniels, in his testimony, said schools need to be more transparent and specific with students about the costs and earning potential of the degrees they're seeking.He praised a new federal scorecard designed to help students compare schools but said it could mislead students unless the data are broken out at the program level.And he backed the idea that schools should share in the financial risk if students can't pay back their federal student loans."Colleges and universities should have more skin in the game," he testified.But Daniels spent a lot of time talking about income share agreements, in which a student contracts to pay funders a fixed percentage of future earnings for an agreed upon number of years. The main advantage is that payments wouldn't be more than a specific portion of income, regardless of whether the graduate is unemployed or underemployed.The Purdue Research Foundation is reviewing six proposals from potential partners to help establish and manage an income share agreement program. Daniels said a decision is expected within about a month.Although Purdue is pursuing the program regardless of support from Congress, Daniels said federal legislation would provide important protections for students and "offer clarity" for the funders.After the hearing, Daniels met with key lawmakers with jurisdiction over a bill introduced by Reps. Todd Young, R-Ind., and Jared Polis, D-Colo., to help create the legal framework for the program.Daniels said he sees income share agreements primarily as an alternative to private loans and to the PLUS loans available to graduate students and the parents of undergraduates. Those types of loans, he said, "deserve a disproportionate amount of the blame for the nightmarish anecdotes that generate the most public alarm."Although traditional student loans can't be dismissed through bankruptcy, Daniels said income share agreements should be different because "it's not debt. This is an equity investment.""If we're really going to shift the burden and shift the risk away from the student, then we should treat it in that fashion all the way along," he said. "It would probably strangle the plan in the cradle if we let it be subject to usury laws."Sen. Bill Cassidy, R-La., said he's intrigued by the concept but wonders whether any potential backers — besides loyal alumni or philanthropists — would be willing to finance first-generation college students or those not pursuing degrees that would allow them to earn high incomes"We'll only know when we know," Daniels said. "But I can imagine, in a fully developed market, these things would work themselves out in very interesting ways."