Experiments With a New Way of Paying for College

Colleges (and nontraditional providers) experiment with income-share agreements as innovation that could help some people afford education and training.

May 22, 2017
 

It’s a symptom of the current moment that ideas that might have some merit, or could help solve a problem, are prematurely described by advocates or policy makers (or, yes, journalists) as the “next big thing” before they have proven themselves effective. This is particularly true in the ed-tech space, but other sorts of purported innovations are susceptible to the same trend.

Consider the case of income-share agreements, which are having a moment and leading to articles like this recent one in The Atlantic, whose tagline says they “could solve [the] debt crisis.”

Income-share agreements are, described simply, a replacement for borrowing in which a student agrees to repay a portion of postgraduation income for a set number of years in exchange for an institution waiving all or part of their tuition. The idea has gained some currency in Washington as policy makers try to find ways to force colleges to share the risk -- to put “skin in the game” -- for when their graduates do not succeed. And the federal ascension of Republicans has given added momentum, because of the role of the private market in financing them.

At this month’s ASU GSV Summit, which historically has contributed to the hype cycle on the technology side of things, the concept got a reasonably well-rounded airing from a panel of experts. (Of course, it would have been more interesting if Matt Reed, who writes “Confessions of a Community College Dean,” had been there, given his scalding critique of the approach, in which he suggests that the “IS” in income-share agreements should be replaced by “indentured servitude.”)

Prominent in the discussion was Purdue University's effort known as Back-a-Boiler (Purdue's mascot is the Boilermaker), which has been the most highly visible experiment with the concept so far.

The Purdue program, which is entering its third year, is designed to replace private or parent borrowing for those students with a gap to fill in financing their undergraduate education. The program was originally designed for juniors and seniors but will be expanded to sophomores in the coming academic year.

Instead of taking out a private or Parent PLUS loan, a Purdue student agrees to pay back a percentage of their income over a set period of time. The proportion and term vary based on the student's major, and the amount they might have to repay is capped at 2.5 times the size of the original amount received. The average person will be expected to repay 1.67 times the amount of the original ISA. Students who earn less than $20,000 won't be expected to repay anything.

Purdue funded the first $5 million for the program through its Research Foundation, but it has now created a separate philanthropic program through which alumni and others can donate to Back-a-Boiler. The program was created, and is administered, by Vemo Education.

Ted Malone, director of financial aid at the public university in Indiana, said he was "as skeptical as can be" when he was first told about the concept, envisioning a scenario where an individual student would have to persuade investors that they are worth the risk. "I envisioned them going through the Shark Tank experience, negotiating with Mark Cuban and being at a distinct disadvantage," he said.

He also fretted that the funds would be made available only to those "who will make a boatload of money" and would end up paying much more than they received, rather than to the English and theater majors whose postgraduate salaries might lag.

But in the Purdue program's first full year, Malone said, the 160 students who accepted roughly $2 million in income share agreements came from 70 different majors representing all of Purdue's undergraduate colleges. Seventy-five percent of the students had calculated financial need, and 23 percent were eligible for federal Pell Grants, he said.

"The ISA is not for everybody," Malone said. "It will appeal to someone who is a little more risk averse," rather than the person who has "all the confidence in the world" they’re going to make a killing in the job market. The latter student could end up repaying significantly more than they would on a parent or even private student loan, he said.

While Purdue has not had many followers into this space in traditional higher education yet -- Malone said that some of Purdue's peer institutions have been "watching and waiting to see how we do … before they put their money on the line" -- the ISA approach is catching on among nontraditional providers such as boot camps.

Also on the ASU GSV panel was Adam Braun, the founder and CEO of MissionU, the latest in the line of entrepreneurial entities trying to replace the college degree. Braun, who says he started the company because his wife had accumulated more than $100,000 in debt without earning a bachelor's degree, aims to give 18- to 22-year-olds a yearlong, blended educational experience that prepares them for a good job.

The program's first cohort in data analytics and business intelligence is set to begin in the San Francisco area this fall, and Braun asserts that MissionU received 4,000 applications for its 25 slots.

Using the ISA concept, students would pay no tuition up front. Upon completion, they would be expected to repay 15 percent of their income for three years, but only upon earning a salary of at least $50,000.

MissionU is counting on the fact that the average salary for data analysts is $80,000. "We set it there because if they were earning less than $50,000, we weren’t doing our job," Braun said.

"Our view is that we don’t succeed unless you succeed," he said. "We can say that because of the income-share agreement."

Will the Idea Spread?

Tonio DeSorrento, president and CEO of Vemo Education, said during the ASU GSV session that the institutions that are experimenting with income-share agreements right now are those that "already have the mind-set" that it is their job to ensure that students succeed financially. "We're oriented toward success," he said, "so let’s get credit for it."

For the idea to expand meaningfully, he said, more colleges -- and potential funders, including governments -- would have accept the view that "value is defined and measured based on outcomes" -- "outcomes" defined narrowly, he acknowledged, as success in the job market. "ISAs capture the private benefit" of an education, but they "don’t measure the public returns to education," which "we can't lose track of."

Beth Akers, a policy analyst at the Manhattan Institute who has written favorably about the role income-share agreements could play in financing higher education, was the closest thing to a skeptic on the ASU GSV panel.

"We know from research that students have very little information about their own finances -- they don’t know how much they’re paying or borrowing," she said. Given that lack of financial literacy, Akers acknowledged the "reasonable concern that we could have students making decisions [about ISAs that are] not in their best interests."

Still, Akers said she believed support for income-share agreements meshed well with the conversations in Washington about the need to hold colleges and universities more accountable for how their students fare after leaving.

"People feel that institutions should have more at stake in this game, that there's not enough on the line for them," she said.

Some of that is likely to be accomplished through more federal "oversight of institutions so there is financial accountability," but some institutions -- by embracing approaches like income-share agreements, which are essentially wage guarantees -- can adopt their own form of accountability.

"We can either have government do it for us," Akers said, "or institutions can do it themselves."

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