Instead of requiring students to pay up front for tuition, some colleges are asking for a percentage of their future salaries. The arrangement is intended to help students avoid going into debt to pay for college.
Norwich University in Vermont recently announced it has joined the ranks of schools offering Income-Share Agreements (ISA), the Associated Press reported. Students with ISAs pay back a percentage of their salary post-graduation for a fixed period of time. Instead of debt, ISAs act as equity as investors (schools) take a share of students’ future income streams, shifting the risk from students to the schools.
At Norwich, its program will begin small and focus on students who don’t have access to other loan types or those planning to take more than eight semesters to complete their degrees.
Students may find ISAs less risky, especially for those without a steady job or lucrative work immediately following college; grads who find themselves underemployed or unemployed may not have to pay anything back and will likely pay less than the cost of their tuition, according to The Economist. Since repayment amounts range from 2 percent to 17 percent of one’s income, higher-earning graduates, such as those in medicine or engineering fields, won’t have to sink all of their new wealth into big student loan payments.
Schools and investors also believe students taking vocational course loads, including computer programmers, plumbers, and nurses, are also safer bets as postgraduate jobs are their goal and wages are viewed as somewhat predictable.
ISAs could further support borrowers and lenders’ interests as investor returns are tied to a student’s career progress. Investors might then offer better terms to students at universities whose graduates have high-paying jobs post-graduation, providing schools with a greater incentive to assist students as higher salaries equate to schools recouping investments in a shorter time period.
A potential downside, however, is that such agreements might tend to discriminate against students who might go into lower-paying careers, according to the AP.
ISAs aren’t new, as Milton Friedman first proposed them in 1955, followed by Yale University’s brief experimentation with them during the 1970s. In the last decade, technical training programs, including coding bootcamps, started utilizing this funding type as their students didn’t have federal student loan access.
But things really changed in 2015 as Vemo Education, a company that works with higher education institutions to develop and implement ISA-based programs on their campuses, moved ISAs into the conversation.
Today, nearly 30 public and private colleges and universities nationwide offer ISAs via financial aid offices, while outside investors provide some capital. Universities see opportunities to lower their students’ debt and steer them from taking out private loans. Meanwhile, investors view educational institutions as having confidence in their graduates’ future earnings.
Purdue University may be considered a success story with its 2016 ISA program launch. Last year, its inaugural participants graduated using ISAs to cover an average of $12,000 in fees while Purdue’s endowment covered the funding.
Other schools, including Clarkson University in New York and Lackawanna College in Pennsylvania, have started using ISAs and another dozen schools are expected to offer the option this fall, reported The Economist.
Author: Debbie Baratz
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