That going to college will help you get a great job in the future is a sentiment echoed by many parents, career counselors, and the general public. College gives you the ability to expand your knowledge and acquire a credential that will help you compete in the modern job market. Going to college is not enough, however: you have to earn a degree at the end. Yet, millions of students each year are dropping out of college and not earning the credential. According to the National Student Clearinghouse Research Center, just 58 percent of students who started college in the fall of 2012 had earned any degree six years later.
This number varies depending on the type of institution a student attends — four-year private schools typically have higher graduation rates than public schools, for example. Two-year community colleges and for-profit four-year schools often have graduation rates below 40 percent. On average, however, around 6 out of every 10 students who go to college will not finish their degree at the end of six years. And yet these students will still have taken out loans to finance their education and will be liable to pay off those loans, even though they have not earned the credential at the end.
In the past, high-school students, parents, career counselors, and others have not given adequate thought about graduation rates when choosing a college. For many students, their decision will often come down to what institution they liked best — what had the best culture, et cetera — or what school offered the best financial aid packages that will help them cover the costs of their education. Indeed, tracking graduation rates is a relatively recent development: such data has only been gathered on a national level since the early 2000s. However, as the student debt crisis continues to grow — the average borrower in the Class of 2018 owed $29,800, according to Student Loan Hero — there has started to be more attention on why so many students are dropping out of school.
Why Are Students Dropping Out?
What is causing so many students to dropout? There are various reasons behind this, and those reasons do vary between institutions, but one of the most commonly cited is the lack of access to the capital they need to finish their education. For many, going to college has been a life-long dream. Going to college is seen as a ticket to a better life — a way to achieve a well-paying and fulfilling job in a crowded labor market. However, many students fail to assess the amount of capital that they will need to pay for that education. Indeed, many other students also see borrowing money as a necessary part of going to college and fail to consider the long-term ramifications of borrowing money to pay for college.
Access to Capital
According to the 2018 National Financial Capability Study, 51 percent of student loan holders in 2018 did not estimate how much they would be paying back monthly before taking out their loan. Perhaps as a result, 48 percent of student loan holders are concerned about being able to pay off their student loans. Many students who take out a loan do not think about how they will pay back that money over the long-term, and so fail to make consistent payments back toward their loan. There is not enough focus on what it actually means to take out a student loan, and so as students continue to go through college, they find it difficult to manage their loans. Students may exhaust all of their available options in pursuit of their degree — and perhaps then resort to private loans, with higher interest rates and less favorable terms than many federal loans — and then realize that they need to find a job quickly in order to pay off their debt.
Rises in Tuition
Further, rises in tuition have also played a major role in the college dropout crisis. According to the 2018 Trends in College Pricing report, tuition at private nonprofit four-year institutions more than doubled in the 2018-19 academic year to $35,830 from $17,010 in 1988-89. As tuition rises, so does the amount of debt that students take out to finance their education. As a result, more students are starting to become dependent on federal student aid options to cover their education, but they only go so far. The total amount that undergraduate students can borrow from the federal government is capped, and the purchasing power of federal grants such as the Pell Grant has decreased as tuition has increased — the maximum pell grant for the 2019-20 year is $6,195. Rises in tuition have not only made college unaffordable for many people but also encourage people to take out more loans to finance their education. Many students are unable to keep up with the loans that they have borrowed, and so they drop out and find a job to cover their costs.
The fact is that lack of access to capital — and the burden that debt imposes — prevents many people from finishing their degree. So, what can be done to bridge this gap? One of the solutions that has recently garnered popularity, especially among Democratic presidential hopefuls, is to make college free and forgive existing student debt. Senator Elizabeth Warren, for example, has proposed a plan that would eliminate up to $50,000 in student debt for every person with a household income of less than $100,000; borrowers who make up to $250,000 would be eligible to have a portion of their debt forgiven. The plan would also eliminate undergraduate tuition at public colleges and universities, and expand access to federal grants to help support students at historically black colleges and universities. However, loan forgiveness is unsustainable — as soon as loans were forgiven, people would end up taking out more loans and the crisis would continue — and free college does nothing to hold institutions to account for the rise in tuition.
How Can Income Share Agreements Help?
Another, more unconventional solution, that has received some attention would be for schools to offer Income Share Agreements, or ISAs, to their students. ISAs allow a student to raise the money they need to pay for their education, in exchange for agreeing to share a percentage of their future income. Students who earn under a certain amount after graduation would not have to make payments until they earn over that amount, or their loan is forgiven — thus giving freedom to those who do not succeed after college from making payments they cannot afford. The total amount a student can pay back is capped to protect successful students from paying back more than a reasonable amount for their education. Thus far, colleges such as Purdue University, Messiah College, and Colorado Mountain College have started offering their own ISAs to students; coding bootcamps such as Lambda School and Holberton School have followed suit, too.
Favorable Payment Terms
There are a few key ways in which Income Share Agreements could help students stay in school. The first would be that students who raise money through an ISA would not have to worry about making payments until they have graduated and are earning over a certain amount. According to the National Center for Education Statistics, 43 percent of full-time undergraduate students were employed while attending college, and 81 percent of part-time students were employed. A large portion of students relies on working in order to help them cover their student loans and living costs, which distracts them from finishing their education. If students are employed while attending college, they are less likely to be able to focus in class and thus find it difficult to reach their full potential in their class. A report by the New York Times found that students who live on campus are more likely to graduate because college becomes part of their life — when they have a problem, they can turn to their friends. For students employed, however, this connection is not present.
Under an ISA, students could focus on their education and would not have to worry about working to cover their living costs. Students could raise money from their school and pay that money back after graduation as a portion of their future income. This arrangement would ensure that students can focus on what matters most: their education. In the coding bootcamp space, schools have started to offer living stipends to students — a type of ISA which provides them with a monthly stipend to cover rent, food, class resources, and other living costs. Perhaps colleges could offer a similar fund that would allow students to raise the money they need without having to take out a loan or work a part-time job. And students would only pay back that money if they succeed after graduation which will provide them with some form of protection if their degree does not pay off.
Move Focus to Graduation Rates
If more schools were to offer ISAs, students would also be more likely to focus on graduation rates. ISAs remove capital as a barrier for students, so they can focus on choosing the institution which provides the best quality education. Many students’ decision about where they go to college depends on the financial aid options available to them at a certain institution. If ISAs were widely available, they would no longer have to focus so much on how they would pay for their education. Students could evaluate the graduation rates, study resources, and other important elements of their education more effectively, and could ultimately make a decision based on what institution they think will help them succeed the most. For lower-income students, ISAs would help them pursue their dream education without worrying about taking out a lot of debt; people of color would also benefit as they have historically had to take out more debt than other students.
Holding Schools Accountable
ISAs would also help hold schools more accountable for their graduation rates. Indeed, schools are starting to pay more attention to their graduation rates. Georgia State University, for example, have started using data to target at-risk students and provide them with the counsel they need to continue in their education. Also, as fewer students attend college — enrollment is down for the sixth year in a row — schools are starting to compete more for students and also spend more time on retaining existing students. However, these measures have not solved the problem. Colleges are still not fully accountable for their outcomes, and if a student does not succeed after graduation, they will still have to make payments back toward their loans. Only 54 percent of student loan borrowers make consistent payments, according to a study by the JPMorgan Chase Institute, which highlights how many people are struggling to repay their loans after college.
Income Share Agreements align the incentives of the school and the student. If the student does not succeed after graduation and earns under a certain amount, they will not have to pay back money to the school. On the other hand, if a student succeeds after college, the school will earn a good return on their investment. Therefore, the school assumes most of the risk and can be held more accountable by students — if they don’t succeed, they will pay nothing. This would help encourage schools to offer more services such as access to more financial aid advice and career advice which would help students make more informed decisions about their financing options and careers. This would help mitigate the risk that people drop out for financial reasons or that people make bad career decisions due to a lack of information. Schools would also be incentivized to invest more resources in student success rather than additional services such as Lazy Rivers which add little value to the success of most students. Schools may hire more teachers and fewer administrators, and focus more on providing students with the best quality education possible. After all, if the student does not succeed, the school will not earn a return.
Case Study: The University of Utah
ISAs have already been proven viable in many institutions. The University of Utah, for example, recently opened its ISA fund which would help final year students raise the capital they need to finish their degree. 27 percent of people who attend college in Utah have never graduated. The program aims to help students access the capital they need to cover living costs and their tuition, and provides an alternative method of funding for people who have already exhausted all other available sources of financial aid. Students can borrow up to $10,000 per fall, spring, and summer academic semesters, and students agree to share 2.85 percent of their income for three to 10 years after graduation, depending on their major and the amount they have borrowed; students who earn under $20,000 per year will not have to make payments. Purdue University, who piloted the first modern-day ISA fund in higher education back in 2016, has since raised $10.2 million for a second fund and has issued upwards of 750 contracts to students.
The Future of the Dropout Crisis
Indeed, ISAs are not a full solution to the problem. Students still need access to more financial education to help them make better decisions about what loans they should take out — if any — and which schools offer the best financial aid packages. Schools also need to invest more resources in helping students stay in school and provide them with more relevant knowledge which will help them thrive in the modern workforce. Further, schools, according to the aforementioned report by the New York Times, should also teach students how to be college students — how to manage their money, how to stay on track, how to seek assistance if they are struggling. However, ISAs would act as a good start and would help students focus more on their education, without having to worry about finding a job to cover their tuition.
As the student debt crisis becomes a more prominent issue, so will the number of students who drop out due to the financial burden of taking on so much debt. In the future, schools will need to be held more accountable for outcomes, and students will need to spend more time evaluating graduation rates before choosing their institutions. ISAs present one way in which the incentives of schools and students can be aligned, which would help encourage students to evaluate graduation rates and schools to invest more in student success. The high amount of dropouts signals the fact that higher education needs to change and colleges need to start focusing more on student retention and success. It’s not a question of if schools will start paying attention to this issue, it is a question of when they will start doing something about it.
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