Purdue University President Mitch Daniels.
It soon may get easier for students to finance college by selling a share in their future selves.
Purdue University is partnering with Vemo Education, a technology firm, in hopes of spreading an alternative form of college financing pioneered at Purdue last year. The product, known as an income-share agreement or ISA, allows students to pay for college by selling a percentage of their future income to a backer, instead of paying out right or taking on debt. Typically, students who go into more lucrative fields pay a smaller percentage of their income during repayment, while students who go into less lucrative fields pay a larger share.
The West Lafayette, Ind.-based public college launched the first college-backed ISA for its students last year to much fanfare and immediately began hearing from other schools interested in offering ISAs of their own, according to the school’s president, Mitch Daniels. The partnership announced Thursday is an effort to help these schools get their own programs off the ground by allowing them to use Purdue’s program as a model and Vemo’s technology to more easily provide students with ISAs, without having to start from scratch.
It’s also a sign of a growing interest and market around this product amid concern about the consequences of having millions of borrowers saddled with student loan debt. “Clearly there’s a need for alternatives,” said Daniels, a former Republican governor of Indiana. “We’ve never suggested this is a complete one, but I believe it can only be helpful if it spreads and grows.”
ISAs have been growing in popularity, at least among conservative circles, for the past few years. The benefit of this type of arrangement, supporters say, is that it better protects students from bad luck. One major downside is that because of the way ISAs are structured, students might wind up paying more than if they took on a loan. The typical term for an ISA is 10 years, so a graduate who pursues a lucrative field of study could wind up paying more because the amount of income they pay out over the 10 years could exceed the amount they needed to pay for school. What’s more, the optics of a young person selling stock in themselves are not great.
Students and parents are often initially skeptical of ISAs when they’re first explained, but once asked to compare them to an equivalent loan, they typically prefer ISAs, according to Jason Delisle, a resident fellow at the American Enterprise Institute, a conservative think tank, who has surveyed families on the topic. Though the current ISA market is still pretty small, Delisle said his data indicates that “there’s potential for them to catch on.”
The Purdue-Vemo partnership can help speed up that growth. By providing both the technology and trusted advice from an academic peer who has experience with the product they can make colleges more comfortable with offering an ISA, said Tonio DeSorrento, Vemo’s chief executive.
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But one major obstacle preventing ISAs from becoming more widespread is the regulatory environment surrounding them, Delisle said. Right now, it’s unclear how they’ll be monitored and what kind of consumer protections they’ll be required to abide by, he said. Though there are signs that could soon be changing. Republican lawmakers have floated bills that would regulate ISAs and a more conservative, free-market focused administration may be more open to this kind of product.
“I see no reason to doubt that the new Department of Education will be friendlier to innovations like this,” Daniels said.
Sheila Bair, the president of Washington College, a small liberal arts college in Chestertown, Maryland, said she’s “hopeful” the new administration will be more open to using ISAs to address our student debt woes. Though the government currently offers students the option to make loan payments that are tied to their income, opting for one of these plans stretches out the term and allows the interest to build. These programs also offer debt forgiveness after a certain number of years of repayment, but that discharge typically comes with a tax bill.
“It’s all been very difficult for students I think,” said Bair, the former chairwoman of the Federal Deposit Insurance Corporation. At her school officials are looking into the possibility of offering ISAs to their students, Bair said. They’ve built some models and talked to donors about it. “We’re working on it, were not ready to launch yet, but I would love to,” she said.
Even if ISAs become more widespread at colleges across the country, students will still likely be coping with debt. Daniels and Bair both see ISAs in their current form as an alternative to private loans or parent loans, not federal student loans, which offer relatively low interest rates and many protections.
But more widespread adoption of ISAs would help relieve parents of the burden of taking on debt and risk for their students to attend college, Delisle said. When a student hits the federal loan borrowing limit — a maximum of $31,000 for five years of school for the typical student — they turn to a private loan which typically needs to be cosigned by a parent or the parents take on debt in their own name. An ISA could replace those options.
“Parents are on the hook if students borrow more than the federal limit and to the extent we think that’s problematic, an ISA is really the only alternative to somehow removing the parents from the calculation,” he said[“Source-marketwatch”]