Income Share Agreements: An Alternative to Traditional College Financing
Many students rely on student loans as a way of covering college expenses. According to the most recent data, among all undergraduate students, 36 percent borrow federal loans and 6 percent borrow private loans to finance their education. Students’ loan repayments often exceed their ability to repay, leading to financial distress or default. In response, federal policymakers have introduced income-driven loan repayment options, such Income Based Repayment and Pay-As-You-Earn.
Income share agreements (ISAs) are another income-driven college financing option that has gained recent attention. With an ISA, an investor provides a student with the funds required to pay for college and, in return, the student promises to pay a percentage of their income for a number of years after leaving school. ISAs share many of the advantages of income-driven loan repayment, but ISAs are based on a time period rather than a debt amount. Recipients could end up paying more or less than they originally receive over the course of the agreement.
In spite of the attention ISAs have received, there is still little know about them. The goal of this series of briefs is to develop a better understanding of how, and for whom, ISAs may work. With this knowledge, innovative financial aid practices can be identified and more broadly piloted to increase students’ access to affordable higher education.
The first brief in this series, The Potential Market for Income Share Agreements Among Low-Income Undergraduates, looks at the potential of ISAs to serve low-income undergraduate students by examining the underwriting criteria used to select ISA recipients, estimating the size of the ISA market given its current structure and funding providers, and estimating the number of students who might plausibly be offered an ISA in an expanded market. Our blog post, Getting Bullish on Income Driven College Payments, provides a summary of our findings.
The second brief, Income Share Agreements on Campus: A Practice Guide, addresses the likely impact of ISAs on how campus financial aid offices will award student aid and the implications of ISAs for campus reporting on student aid. This brief draws on expertise from financial aid officers and the National Association of Student Financial Aid Administrators (NASFAA). Our blog post, The Goldilocks Problem: Finding the Right ISA, provides an example of how ISAs could affect other student aid.
The third brief, Searching for the Best Deal: How Students and Their Parents View Income Share Agreements, explores high school students’ and parents’ perceptions of ISAs as well as their decisions about how to pay for college.
The fourth brief, How Loan-Averse Young Adults View Income Share Agreements, concludes that ISAs could provide an alternative to student loans—in particular, for loan-averse individuals whose views of student debt are determined primarily by negative experiences with debt among family and friends, thereby removing one key barrier to college-going for this population.
The final brief, The Income Share Agreement Landscape: 2017 and Beyond, explores the current state of the ISA market and highlights opportunities and threats to expansion. Based on a survey of ISA funders and interviews with ISA experts, we found that the ISA market expanded through partnerships with institutions and by emphasizing how ISAs protect against a risky labor market. The ISA market faces several barriers to expansion, including the complexity of its products, public mistrust, and unresolved legal questions. Changes to the Graduate PLUS loan program may open the door to further expansion of the market.