“Momentum is growing around ISAs,” says the authors of a report on how income share agreements could impact the way students pay for college in the future. The model, which requires students to pay a percentage of their salary back to a lender after graduating, has gained traction as more companies and universities have begun experimenting with the idea.
Whether or not that momentum is headed in a direction that will offer students a reliable alternative to debt, however, remains a question for many who study the private borrowing space.
The folks at Entangled Solutions, a research and consulting arm of the higher-ed incubator and investment firm, Entangled Ventures, have an optimistic approach in their recent report, “The Future of Student Aid.” The study overwhelmingly calls for investment in and support for ISAs, which Entangled Solutions principal consultant Michael Horn admits are in an “uncertain state” given the little research available on its outcomes.
To ease some confusion, researchers behind the study lay out the major ISA companies, investors and strategies that exist including Vemo Education, Avenue Funding and Lumni. (We also offer a glossary to the basic terms here.)
The report argues how the income-share option may be more equitable by expanding access to education for those whom private loans may result in unrecoverable debt, or might not be an option at all. “Private student loans require a substantial credit and work history, which has shown to disproportionately rule out low-income and minority students,” the report, which analyzes other alternative financing strategies like employer-paid and refund-based models, reads.
The authors also make the case that risk-sharing could lead ISA companies to be more involved in student success, since a student will only pay the money back if they are earning an income. The study points to programs like that at Purdue University, where 160 students are receiving $2.2 million through the college’s Back a Boiler program in exchange for a portion of their post-graduation income. “This protects students who are unable to pay due to unemployment or underemployment, as well as students who earn a substantial income,” the report states.
The average Purdue student in the program receives nearly $13,800 in funding, and promise to pay part of their income for 6 to 10 years after graduation. (Exact terms vary by student.) At Purdue, different fields of study may qualify a student for different payment plans, depending on what they might be able pay back after college. For example, a computer science major would likely receive lower rates than a humanities major because CS incomes are predicted to be higher.
Sara Goldrick-Rab, who teaches higher education policy and sociology at Temple University, said in a recent interview with EdSurge that she sees privatized ISAs as “dangerous” given that borrowers and families must make predictions about their economic futures.
To critics like Goldrick-Rab, Horn considers Purdue’s approach to ISAs as a success, calling it an example of how an institution can “put real skin in the game” alongside companies and private providers. “What I found interesting about Purdue was the way they cap how much you can pay,” Horn adds. “If you are wildly out-earning how much is in your major, you won’t continue to pay 4-5 percent of your income for 10 years to the institution. It will be lower.”
But skeptics point out that this strategy could favor higher earners or students who have an economic safety net. Benjamin Studebaker, a PhD candidate at the University of Cambridge, writes that “private sector investors don’t have any reason to lend a student money unless they believe they can make a profit off that student.”
Advocates of the model disagree. “A lot of people think ISAs are for rich people,” Alexander Holt, an ISA researcher and education policy analyst at New America, tells EdSurge. “But that makes no sense because if you are have money, why would you take out financing that forces you to pay back a percentage of your income that you know will be high?”
Holt, who studies ISAs, has other reservations about this approach, though. He points out two kinds of risks and concerns. First, he says there is a "downside risk" where a borrower might later on want to switch jobs or could have trouble finding work. Second is the "upside risk," he says, where a person earns more than they anticipate and therefore pays back more money than they would if the student had taken out private loans.
He also likens the ISA model to a startup, where students sell shares of their future earnings. That analogy highlights his other concerns: risks for investors putting money into ISA funds, and what motivations are behind the lending companies. “It’s a startup human,” he says. “Why do companies give away equity? Because it’s the only way they can receive capital.”
There also also some who describe ISAs as “indentured servitude.” Matt Reed, vice president for learning at Brookdale Community College, previously wrote for Inside Higher Ed that “if a startup fails, you can declare it bankrupt and start another one. The same does not apply to people. That’s why the ‘indentured servitude’ critique keeps sticking.”
The report explicitly acknowledges the loaded comparison in a section bluntly titled: “Discredit Ethical Claims.”
“Those who hold this view, assume that students lack the freedom to make their own career decisions and are beholden to investors until they are relieved of their payment obligations,” the report reads. “However, given the flexible payment plans that are tied to income, students are free to move from job to job, take time off, and even start an entrepreneurial venture without penalty.”
Horn says he believed the indentured servitude comparison about three years ago when he first heard about ISAs, but that his opinions have changed over time. “I realized debt is way worse [than ISAs]. But here, if your outcomes aren't good you won’t be on the hook for paying for something you can’t afford.”
Where all parties likely see eye-to-eye is around the need for more research, which Holt and Horn say ISAs are in tremendous need of. If there’s one bottomline to take away from the report, Horn says it’s that “foundations and researchers need to do more on this to understand what guardrails need to go in place around ISAs.”
