Trading a Percentage of Tomorrow’s Pay for Today’s Tuition, Four Ways It Could Help
Senator Marco Rubio (R-Florida) and Congressman Tom Petri (R-Wisconsin) last week introduced the Investing in Student Success Act to encourage the development of Income Share Agreements (ISAs).
Writing in the National Journal’s Education Insiders blog, Fawn Johnson explained ISAs this way: “The bill would create a legal framework under which the student can agree to give the investor a portion of his or her earnings after college for a fixed period of time. The amount (5 percent? 10 percent?) and the time frame (10 years? 20 years?) is up to the individual parties.
"The investor could strike gold by paying for the next Bill Gates to go to college. Or the investor could wind up gifting much of his or her original investment if the student winds up working … for subsistence wages. What is certain about this arrangement is that the student won't default. It's impossible to ruin his credit based on how much he owes.”
If Rubio and Petri’s plan successfully widens the use of ISAs, the nation’s college students could benefit in four ways.
First, ISAs can provide a new source of financing. This would augment federal student loans, which have borrowing caps that don’t always cover students’ total cost of attendance, and private loans, which may have disadvantageous repayment terms or be unavailable to those without a co-signer. Students who think they have the skills and abilities that permit them to obtain better loan terms than those available through federal or private lending—such as high ability students studying in comparatively expensive institutions—seem to be the most likely takers. High-ability students interested in robotics or biotechnology, rather than aspiring sculptors, are most likely to be entering income share agreements.
Second, these agreements give the financier an economic interest in the students’ success. In contrast, federal or private loans are mostly recovered even if the student has an unsuccessful outcome. This may spur investors to provide complementary services to protect their investments—including valuable mentoring and networking.
Third, these agreements may encourage the development of a new source of financing available for institutions and programs that aren’t eligible to award federal aid now. Federal student aid does not extend to all postsecondary institutions or programs of study, and it cannot be used for alternative forms of credentialing (e.g., industry certification). In principle, investors may opt to finance these kinds of novel skill-building opportunities as well as traditional programs and degrees.
Fourth, perhaps the largest payoff to these new financing arrangements could be their capacity to change what information is available to students. If information about investment plans is aggregated and made widely available, it could provide students with strong, clear signals about the price of their educational choices—e.g., how the high school grades they earn, the majors they choose, and the institutions at which they enroll determine how much and how long they must pay for their college educations. Want to study geology rather than chemistry? That’s fine. But it will cost you five additional years of earnings.
The ISAs supported by Rubio and Petri are not designed to substitute for federal student loans – but they are a welcome development in a system of financing in which innovation is badly needed.
Tom Weko is a managing researcher at AIR.