Earlier this month while reading University Business Magazine, I learned about “Income Share Agreements (ISAs),” an up and coming mechanism to finance post-secondary education.  An alternative to traditional financial aid mechanisms, ISAs allow private investment firms or institutions to front tuition costs and fees for students under the condition they will surrender a percentage of their future income for a given amount of time after they graduate.  These differ in the sense of costly expensive loans that require graduates to pay back the original student loan plus interest in monthly installments that often spread over decades.  Furthermore, ISAs are often set at a fixed rate, with no accrual of interest.  Tonio DeSorrento, CEO of Venmo Education, cited that “loans keep score with interest; ISAs keep score with incomes.”

ISAs are based on expected incomes, and therefore puts more ownership on the institution and individual to ensure expected outcomes are met.  With state and federal government holding institutions more accountable for these outcomes (i.e. a job in their field after graduation), institution sponsored ISAs (through the use of endowments) may be one avenue for them to enter the conversation.  Students must obtain a “good” job out of college for an ISA to be mutually beneficial for both parties.  However, ISAs present more of a risk for investors than student loans because the investor is hoping to get more money back (assuming the student makes more money post-graduation).    If a student is underemployed or non-employed post-graduation, they simply don’t pay.

After a quick Google search, I learned that Purdue University offered the first institution backed ISA initiative, “Back A Boiler” in the Fall of 2016.  Individuals interested in learning more about the model, can read an article published by the Atlantic on March 15^th, 2017.  The success or downfall of Purdue University’s ISA program may influence the landscape of student financial assistance in the United States.  Zakiya Smith, strategy director of the Indiana-based Lumina Foundation and a former senior policy advisor for education in the Obama White House, states that “college-backed ISAs have been lauded as a way for colleges to have skin in the game with regard to the financial success of their students and to give institutions incentives to equip their students with marketable skills and support their alumni in securing employment.”

Pros:

With higher education costs and student loan debt on the rise across the United States, ISAs offer an alternative to costly student loans.  Due to the fact that ISAs are based on a person’s income, students will never pay more than they can afford.  This is in contrast to current student loan programs that require students to pay back a set amount with interest for the duration of the loan.  While some student loan programs allow for an income based repayment plan, not all students qualify.  Furthermore, ISAs often do not require a parent cosigner, which opens the door for those students who identify as first generation. Additionally, private companies and firms can offer ISAs to students in fields that are needed most or that are in high demand within a particular geographical region.  Finally, ISAs often have fixed rates, so students do not have to worry about variable interest rates.  While students may pay more utilizing an ISA over the long term, they are never paying more than they can afford.

Cons:

Currently, ISAs are not tax deductible.  Additionally, there are few state and federal regulations concerning who, what, where and when ISAs can be offered.  Furthermore, a high earning student may pay more utilizing an ISA than if they signed for a private or federal loan.  Critics of ISAs argue that it would benefit investors to select students attending top universities (those likely to be high achievers) which would not help the student loan crisis for the middle class.  As such, investors would get the biggest return on their investment.  While ISAs have received some widespread support, including policymakers such as Senator Marco Rubio, some caution that some academic fields could all together disappear if ISAs were only utilized to attract students to a particular field (for example, STEM fields).

The Future:

It remains to be seen the impact ISAs will truly have on the future of higher education and financial aid policies.  However, they are often an underutilized form of financial assistance that may be worth looking into for some students.  Scholars and practitioners should begin to look at the impact ISAs can have on maximizing student success while minimizing financial burden.