Student loans, while useful in a wide variety of cases, are not for everyone. Students who are debt-averse, or who would prefer to pay for their education contingent on their school providing them with clear value, are not best served by the existing system.
Right now, if a student enrolls in a federal student loan, they are subject to a payment obligation that must be paid back in most cases, irrespective of a student’s success. The payments—unless a student is enrolled in an income-contingent repayment plan, the plan favored by only eight million borrowers—will also be fixed, without regard to earnings.
As a result, it makes sense that policymakers, educators, and schools have been searching for a solution to the problem. Proposals range from giving schools more skin in the game by requiring schools to share the risk associated with defaulting students, to more bold proposals such as forgiving student loans altogether.
In addition, over the last few years, a group of educators, students, and policymakers have become particularly interested in another solution: Income Share Agreements. This solution, with both bipartisan support and interest from the federal government and educators, is perhaps one of the more promising proposals made to date.
The idea behind Income Share Agreements is to provide a lower-risk alternative to traditional student loans. ISAs allow students to pay no tuition upon enrolling in a school, in exchange for a fixed percentage of their post-graduation income. This percentage will be paid over a certain period of time—depending on the income-share percentage—and no interest will accrue. If student’s make less, they pay less; students who earn high salaries will pay more, up to a certain point.
The main risk mechanism in ISAs is the minimum income threshold: if students do not earn over a certain amount, they are not obligated to make repayments. Instead, the student will go into deferment—where no interest or penalties are incurred—until their deferment period expires, after which point the number of months remaining on their ISA will reduce.
ISAs have emerged as an outcome-based financing solution, when they are designed in accordance with best practices. For students, ISAs give them a feeling of protection against bad practices from their school: if the student does not succeed, their payment obligations will be reduced. For schools, they are given an incentive to deliver a higher quality education; if they fail to do so, they will be placed under financial pressure.
Federal Involvement in ISAs
To date, the extent to which the government and Congress have been involved with ISAs has been limited. In the last few years, various congresspeople have proposed legislation relating to ISAs, more specifically the Investing in Student Success Act back in 2015, and the ISA Student Protection Act in mid-2019. However, now there are signs that a federal ISA program may be imminent.
The U.S. Department of Education is expected to create an experimental program which would allow colleges to take on a student’s debt burden and repay their balance. In exchange, the college could offer a student a new financing option under which they will repay the rest of their outstanding payment obligation.
This experiment is being touted as a way to enable more colleges to offer ISAs, where colleges would take on a student’s loan, and in exchange allow the student to change their payment to an ISA. And as with any education financing proposal, this solution has strong proponents and opponents debating the efficacy of this program.
Supporters argue that ISAs have the capacity to give schools more responsibility, thereby introducing much-needed accountability into education. Whereas opponents argue that ISAs undermine student loan protections, and are merely a loan repackaged with another name. One of the most high profile opponents of ISAs has been Senator Elizabeth Warren. That said, legislation such as the ISA Student Protection Act sets forth reasonable student protections which, if passed, would mitigate most of the concerns being raised by opponents.
Thus far, information on the program is limited, and no official announcement has been made by the Department of Education. The Education Department discussed the proposal, an Experimental Site—a program authorized by Congress to test the effectiveness of “regulatory flexibility for participating institutions disbursing Title IV student aid.”—at a conference in early December.
Under the Experimental Sites program, the Education Department has the power to conduct limited experiments. These experiments allow the Department to test various new ideas in a controlled environment, which could yield further evidence to support or oppose certain ideas related to federal aid.
The program would work as follows. Participating colleges would take out loans on behalf of their students, through the college. The borrower, if they agree to the arrangement, will sign over their loan to the college, and instead repay the money they owe based on a prearranged payment agreement. This arrangement must be approved by the Department. The college will repay the loan on one of the federal student loan repayment plans, or as one lump sum, and use the money to offer an ISA or similar obligation to students.
The Efficacy of a Federal ISA Program
The goal of this program is to experiment with risk-sharing financing models which allow colleges to take on more accountability for student outcomes. The program, according to the Department, would “more carefully align pricing structures with projected student earnings to ensure the highest return on investment for students.”
This program has the potential to help shed more light on the efficacy of ISAs. Experiments under the Experimental Sites program give the Education Department useful information with regard to the efficacy of various proposals, which would help them be more diligent in crafting future proposals. Indeed, this program could yield valuable data on how ISAs should be structured, and whether they can, in fact, offer a viable and stable alternative to traditional student loans.
However, there are opponents who argue this program could do more harm than good. Some opponents believe that the best way in which the Trump administration can get involved with ISAs would be to help create a regulatory and legal framework under which the agreements would be governed. This, in turn, would ensure solid protections were available for students as soon as possible, thus reducing the chances of abuse in the market.
Opponents have also argued that the department may not be able to effectively oversee the program, given its history with programs such as the Public Service Loan Forgiveness option.
Other opponents have gone as far as to state that this program may not be in compliance with the mandate for the Experimental Sites Initiative. The Senate report that updated sections of the initiative included statements that were supposed to limit the authority of the Secretary of Education, in order to ensure the power of the department was kept in check. And, given the fact this proposal could make significant changes—albeit on a small scale—to federal student financing for students in select colleges, there are questions over whether Congressional approval should be sought.
That being said, the Department, in a document uncovered by Inside Higher Ed, has in mind a few student protections to mitigate the prospects of abuse under this program. Students would have a choice over whether they participated in this program, and could instead take out a traditional federal student loan if they would prefer. Forgiveness options must also be included in the contract in case of extreme circumstances—disability, closure of the school, and death.
Schools would only be eligible for the program if they have not had any of the following, according to a presentation from the Department: a cohort default above 30 percent in the last three years; violations of the 90/10 provision in the last three years; a Composite Score of less than 1.0; among “other criteria.”
Potential of ISAs
This program has the potential to greatly advance innovation in federal aid, and help the Education Department (and policymakers and educators more broadly) to gain a firmer understanding of the value of ISAs. Over time, this program may yield valuable data which could be used to write more informed legislation.
For many students, this program would increase availability to a financing option contingent upon success, which has become increasingly important given dwindling confidence in the value of some college programs. A recent Gallup poll found that only 51 percent of adults believe higher education is “very important,” down from 70 percent in 2013.
That said, there are downsides. Without strong legislative guidelines, there is a chance that ISAs could be abused, and not structured in the best interests of students. Also, giving colleges an incentive to enroll students in programs with high expected salaries may result in some colleges not serving certain groups who want to pursue majors with less promising job prospects. But, the only way we’ll know for sure is to watch how this experiment plays out.