This fall, around 19.9 million people are expected to go to college, and many will take out loans to finance their education. The federal student loan system was designed to ensure that everyone interested in going to college could do so, without having to worry about capital as a barrier. However, the system has not achieved its goal, which has students, parents, policymakers, and the public looking to solutions such as Income Share Agreements (ISAs). Borrowers currently owe around $1.6 trillion, and the student debt is the second-highest source of household debt, after mortgage debt. These loans are owed by around 44 million people, and two million of those have defaulted on their loans over the last six years. It is projected that by 2023, nearly 40 percent of borrowers will default on their student loans.
The Student Debt Crisis Is Growing
Students take out loans because they believe that their post-graduation income will allow them to cover their education-related costs. However, four in ten recent college graduates are in jobs that do not require a degree, according to a study by the New York Federal Reserve. Further, a report by the National Student Clearinghouse Research Center found that, on average, just 59 percent of students who started college in the fall of 2012 had earned any degree six years later. Many students are not earning the higher incomes they expected, and are struggling to pay back their loans as a result. The high dropout rates, combined with the increasing amount of students who cannot pay back their student debt, has caused many people to lose confidence in the value of higher education, and skip college altogether in favor of alternative options.
The Promise of Income Share Agreements (ISAs)
Colleges and vocational bootcamps are starting to explore a new method of financing which would address these issues: income share agreements, or ISAs. Through an ISA, a student will make payments as a percentage of their post-graduation income, only if they earn over a certain amount — referred to as the minimum income threshold. This means that if a student becomes unemployed or underemployed after graduation, they will not have to make payments toward their education. Schools can, therefore, be held more accountable for student outcomes — if students don’t succeed, the school will suffer financial consequences. ISAs also provide an alternative to borrowing for those who are unwilling, or unable — many loans require a co-signer or a good credit score, which restricts access for many people — to take out a loan.
Edly, a marketplace allowing schools to offer Income Share Agreement-based financing options to their students, estimates that by 2020, 175 institutions will offer ISAs and $500 million in agreements will be originated. Over the last few months, dozens of new companies have entered the ISA space in a variety of different capacities. Some colleges, such as Purdue University and Lackawanna College, offer ISA-based financing options to their students.
Coding bootcamps like Lambda School and Holberton School also offer access to ISA-based financing, and more bootcamps have followed their lead. In addition, there are a series of startups offering financial infrastructure to help increase access to these agreements. For example, Avenify offers a peer-to-peer lending platform for ISAs; Blair offers an investment platform for ISAs and; Vemo Education provides comprehensive support in starting and maintaining an ISA program to both colleges and skills academies. Figure 1.0 shows the State of the Income Share Agreement (ISA) 2019 Market Map.
State of the Income Share Agreement Market Trends
As the student debt crisis becomes a larger problem, and as the debate over skin-in-the-game continues among colleges, ISAs will likely become a more popular financing option. In this report, we have analyzed the contributions of the main market players and divided them into four categories:
- Market Leaders: Companies that have demonstrated significant progress in the ISA space and have made major contributions to the market.
- Emerging Players: Companies that have demonstrated good progress but have not yet made enough unique contributions to the market to be classified as a Market Leader.
- Visionaries: Companies that have demonstrated their capacity to innovate, but have a limited track record in terms of execution.
- Niche Players: New market entrants or companies that offer ISAs but have made few or no unique and significant contributions to the space.
The report also identifies a number of industry trends in three main categories: coding bootcamps; financing ISAs and capital and; legislation. For example, the report outlines how ISAs have started to become the norm in coding bootcamps as they allow bootcamps to build trust with their students through having more skin-in-the-game. The report also explains trends toward new secondary markets opening up to help any student, irrespective of their college or institution, to access ISA-based financing options. As the market continues to grow, more institutions are expected to offer ISAs and more legislative action is expected to continue over the next few months. Figure 2.0. shows the State of the ISA Market 2019 Quadrant.
The Future of Income Share Agreements
ISAs have the ability to align incentives of schools and their students, and thus introduce a new level of accountability. Schools that offer ISAs and fail to help students succeed will not be able to function economically, whereas schools that render successful graduates will earn a higher return from their students. Critics do have concerns about ISAs, however, such as their ability to allow schools to discriminate against groups who may earn lower salaries. Although the modern-day ISA market is only a few years old — Purdue University launched the earliest modern-day ISA program in 2016 — significant progress has been made toward expanding access to this innovative method of financing.