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If you have piling student debt, you are probably worried that you will not be able to pay it off and many other students struggle with the same thoughts. It can be a double edged sword and put you in a tough position when you have to choose between having student loan debt and getting a degree or being debt free without a degree.
Purdue University has designed a new model for their tuition financing that is bound to change the way students incur debt. The model has been designed to help solve the debt issues among students and completely open up new possibilities to all students so that they too can get a great education and move into a higher career.
The new model will not start until 2016, but the basis of it is to allow private investors to invest in students at the University through a program called Income-Share Agreements (ISAs).
What happens throughout the program is investors are able to purchase a share of a student’s future income for a length of time. The exchange is the cost of tuition. This idea is definitely not new in the realm of the financial world, but it is something that could completely change the way students pay for their college.
Where Did the Idea Come From?
The first idea of ISAs came from a man by the name of Milton Friedman in 1954. The idea was that investors would buy shares of an individual’s potential earnings. In this sense, the investor would profit from the students whose careers paid more than what the tuition itself would cost.
This idea made a student’s tuition affordable to the investor and he or she would have a stake at a set portion of the student’s income over an amount of time. There is no interest rate to worry about and no debt to fret about.
Challenges Facing the Idea
Students in the United States graduate with an average student loan debt of $27,000 to $35,000. This is a large amount of debt and many students feel hopeless by the time they are moving into their career. If a student does not secure the job he or she wants, then that student will struggle to pay back the loan amount while not even working in a field they desired.
The ISA idea is a great one, but it does come with some challenges. Other investment firms have attempted to provide this type of financing before, but faced challenges when it came to regulation.
Purdue plans to start implementing ISAs in the Spring of 2016 and the college president is excited about it citing that he believes this low risk and low debt option will benefit students.
While some people may not agree with the idea behind ISAs, they do provide many students with an affordable way to go to school and pay back their tuition without having to struggle with debt. There is no unfair agreement and each student has the chance to decide on a manageable payback timeframe, amount, and more.
In fact, if a student is not able to move into their career or they do not get paid as much as they expected, the only person feeling any disappointment is the investor.
Since the investors are looking to try and turn a profit, they will likely invest in students whose tuition is going to be higher such as a doctor or a lawyer. This is because the student’s income is projected to far outweigh the amount of debt they will incur.
Final Thoughts on Student Loan Debt
As the student loan debt amount continues to balloon out of control, investors are a good idea and the ISA program at Purdue may prove to be quite successful, thus starting a positive trend.
While Purdue is the only school implementing the new ISA program as of now, students can still receive federal student loans to continue going to school. It is important to keep in mind that you should limit the amount of debt you take on by only borrowing the amount you need to go to school and not adding in extra expenses that can be paid for with a side job.
Author: Jeff Gitlen