What Is an Income Share Agreement?
A college education is getting increasingly expensive. More and more students and parents are wondering if the cost of college is worth the return on the investment. For the academic year 2016-17, the cost of attending a public 4-year university was, on average, $19,488 for one year. That included tuition, fees, room, and board. It did not include books. Unless a student is on scholarship or the parents of the student have saved up a lot of money, a college education puts a great financial burden on the family of the student planning on attending college.
Income share agreements offer an alternative way to pay for a college education.
What Is an Income Share Agreement?
An income share agreement (ISA) is a type of college financing where a student agrees to pay for their college education, or a portion of their education, by making pre-determined payments after graduation based on a percentage of their income. The payments are set up to reflect what a payment would be for a similar private loan.
An income share agreement ties a student’s major field to their financial success in a job or career after graduation. Most colleges and universities already perform student learning outcomes-based evaluations of their programs due to their need to prove themselves worthy to their accrediting bodies. Income share agreements encourage them to be even more transparent with their outcomes-based evaluations. Graduates of colleges and universities will be dependent upon excellent outcomes of their schools’ educational objectives in order to get a good job that will assist them in paying for their college education funded by income share agreements.
Colleges and universities will also be dependent upon good outcomes evaluations in order to recruit students to their programs.
An Alternative to Traditional Student Financial Aid
Parents and students are getting frustrated and overwhelmed with the cost of a college education. No matter what course they take to finance it, they still end up with extraordinary amounts of debt at the end of four years. If a student goes on to graduate school, the debt is almost insurmountable. Students and their families are drowning in student debt.
Currently, students compete for scholarships, hoping to get a “full ride,” academically or athletically, for their undergraduate studies. However, if a student doesn’t get a scholarship and her parents don’t have enough money saved for tuition and other expenses, then she has to apply for student loans. The parents can also apply for the parent’s part of the student loan package, the PLUS loan. These loans allow parents to borrow enough money to fund whatever need is not met by other financial aid programs, although they come at high-interest rates.
Income share agreements are not new. A famous economist, Milton Friedman, proposed the program in the 1950s. Yale University attempted an offshoot of the concept in the 1970s but failed due to its poor organization. Higher wage-earning students were expected to repay the cost of education for lower wage-earning students at the end of the program. That didn’t work out well for Yale.
Income share agreements are back, but they are not fully embraced by all colleges and universities. Purdue University offers a limited income share agreement program. They provide funding for a student’s education, or part of it, and are paid back through fixed payments at a fixed interest rate after graduation and upon employment. The University of Utah just began offering income share agreements to 18 majors. Private firms sometimes team up with colleges to help them design their programs.
Income share agreements require colleges and universities to be considerably more accountable regarding the quality of their education and their job placement efforts than they have ever been. When students graduate, they don’t owe a student loan plus interest. Instead, they owe a percentage of their future income. Income share agreements allow a student to pay for their college education on the back end of their education with their own earnings, instead of on the front end of their education with borrowed money.
How Does an Income Share Agreement Affect Your Personal Finances in the Long-Term?
There is a concern, called the Bennett Hypothesis that income share agreements, in addition to student loan debt, will cause colleges and universities to be even less sensitive to the cost of college educations than they already are. The Bennett Hypothesis states that for every dollar of student loan money available, college tuition and fees rise. There is a fear that especially private schools may raise the price of tuition and fees since there is a virtually unlimited supply of money available to students through private lenders offering income share agreements.
Students could end up paying substantially more out of their eventual income using an income share agreement than they would pay for a federal student loan because income share agreements are currently unregulated.
There were two bills introduced in Congress to regulate income share agreements to some extent. Both addressed putting a cap on the terms that income share agreements could offer students. They also addressed the legal uncertainty surrounding income share agreements and the entrants into the income share agreement marketplace.
Meanwhile, millennial students have taken matters into their own hands. Lumni is a dual-sided marketplace that connects students that are interested in income share agreements with institutional sources of capital.
Students who are interested in income share agreements should approach with caution. They should work with the student financial aid officer at the university of their choice and determine if traditional student financial aid would be cheaper for them to repay upon graduation, or if an income share agreement based on future earnings would be more beneficial.