The student debt crisis has become an even more prominent issue as Democratic presidential hopefuls call for an end to student debt. There are currently $1.6 trillion of outstanding student loans, owed by over 44 million people. And each year, one million people default on their student loans. Indeed, student debt has become a problem which many Americans encounter, and one with no obvious solution. Despite the steep rise in tuition over the last few years, college outcomes have not improved significantly. Four in ten recent college graduates are in jobs that don’t require a degree — breaking the promise of higher earnings many people expected to receive when they had completed their degree. At more than a third of American colleges, less than half of the students who enroll earn a degree within eight years; even if a student goes to college, there is no guarantee they will succeed.
In the midst of this there have been many politicians who have proposed solutions to the problem. Senator Lamar Alexander recently proposed a package of ideas to reform the Higher Education Act, the main legislation which governs the higher education industry. Among other things, Senator Alexander’s proposals include Pell Grants for incarcerated people, increases in Pell Grants — albeit only $20 — and expanding access to Pell Grants for short-term training programs which last eight weeks and over. This is one of the more conservative proposals, and has already received scrutiny from many people who believe this is not enough.
Many Democrats have made grand proposals to solve the student debt crisis. Senator Elizabeth Warren wants to provide up to $50,000 in student loan forgiveness for those earning over $100,000; those earning up to $250,000 would be eligible for partial forgiveness. Senator Bernie Sanders wants to provide access to free community college for all. But none of these proposals fully address the main problems: tuition increases, and the lack of accountability which allowed tuition to increase at such a high rate.
Over the last few years, another option has become more popular: Income Share Agreements, or ISAs. ISAs are a funding instrument where, rather than paying upfront, a student will agree to pay a percentage of their post-graduation income, but only if they earn over a certain amount. Thus, students’ payments will be deferred until after they graduate, and they will only start making payments if they are successful. In the case where a student becomes underemployed or unemployed, they will not have to make any payments. If a student earns under this amount for a certain number of years, their agreement will be forgiven. So far, both traditional colleges like Purdue University and Colorado Mountain College have started offering ISAs to their students, as well as coding bootcamps such as Lambda School and Kenzie Academy.
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Although ISAs can be traced back to 1955 when Milton Friedman proposed the idea in his paper, “The Role of Government in Education”, most activity in the space has occurred within the last few years. Indeed, Purdue University — who operates one of the most prominent ISA programs — launched their “Back a Boiler” ISA fund in 2016. Since then, they have issued contracts to over 750 students and have raised a second ISA fund of $10.2 million to help expand access to ISA-based financing options for students. Those who support ISAs often have different views of the extent to which these programs could change education financing. Some proponents, like Sheila Bair, the president of Washington College, advocates for ISAs as a replacement to federal student loans; Senator Todd Young, an Indiana Republican, is in favor of demonstrating these agreements work before going further.
As ISAs continue to become a more popular method of education financing, there have been questions raised about what we can expect in the future of the space. Based on my analysis, there are four different scenarios that could play out. Firstly, ISAs could proliferate into colleges and become a viable alternative to traditional student debt. Secondly, ISAs could expand into more bootcamps — especially outside of the coding industry — and become a default vocational education financing vehicle. ISAs could also fail to disrupt education financing and continue as a niche method of financing education. Lastly, ISAs could receive too much federal involvement which will stifle innovation in the space and limit the potential of these agreements.
ISAs Could Disrupt College Financing
In the future, ISAs could become a more popular alternative to traditional student debt. Indeed, around ten different colleges — including Purdue University, and the University of Utah — are offering ISAs to their students right now. However, there has been more interest among administrators in recent years to offer ISAs as an alternative to options such as private loans. Universities and colleges have started to see ISAs as a way in which they can solve some of the core problems in their institution, while offering more equitable and manageable repayment terms to their students. The University of Utah, for example, launched the “Invest in U” ISA fund to give seniors the capital they needed to finish their education. In Utah, many people drop out in their final year because they have exhausted their other financing options, so the university decided to launch an ISA fund to help mitigate that problem.
The public sentiment toward student loans has become increasingly negative, which further suggests how ISAs could expand into more colleges in the future. Indeed, more people are starting to question the value of college relative to the cost of tuition, and enrollments are down for the eighth year in a row. Colleges could start offering ISAs to help reaffirm the value they provide to their students. After all, if a student does not succeed after graduation and gets a low-paying job, they will not have to make payments toward their ISA. Conversely, if a student derives a lot of value from their college experience, they will make commensurate payments based on their income. Although there are questions about how these programs should be structured, students are becoming increasingly interested in ISAs as an alternative to student debt. Thus, in the near future ISAs could become a new alternative to student loans available in a variety of different institutions. In this case, adequate legislation would also be introduced to protect ISAs and students who have financed their education through the agreements.
ISAs Could Become the Norm in Bootcamps
The second possible scenario would be that ISAs could expand further into coding bootcamps and become the norm for vocational financing. Vocational education institutions such as coding bootcamps are largely ineligible for Title IV funding — grants, loans, and aid provided by the federal government to students under Title IV of the Higher Education Act. This means many students have to rely on personal savings or private loans for their education, which results in many people being unable to attend these institutions. ISAs, on the other hand, would offer passionate learners another option: attend our school upfront, and pay for tuition as a percentage of your future income. Already, over 40 bootcamps — primarily in the technology sector — are offering ISAs as a method of financing education. Students therefore do not have to rely on private loans, which have higher interest rates and less favorable terms than federal loans offered to college students.
In addition, ISAs may also continue to grow in bootcamps because they help schools signal their value. Because students only pay money back if they succeed, then the school has a strong incentive to invest in student success. Many bootcamps which offer ISA programs have spent more of their money on employer partnerships and student success than other institutions, because doing so would increase the likelihood their students would find a good job after graduating. There is also a big debate going on with regard to whether coding bootcamps and, to a broader extent, vocational schools in general are viable alternatives to college. An ISA would help these schools attract students because they would only pay if they succeeded — if a student was unsatisfied, they could always go to college afterward. The value signaling effect would extend to any type of vocational school, not just coding bootcamps, who are also facing the question of whether they are an alternative to school. Thus, ISAs could become more popular among vocational schools, and becoming more popular than private loans for vocational training in the near future.
ISAs Could Fail to Disrupt Education Financing
On the other hand, ISAs could fail to disrupt further education financing and retain their position as a niche alternative to student loans. There are a couple of reasons to suggest this could happen. Firstly, there are still many people skeptical of the value an ISA can provide a student — some of these skeptics are also lawmakers, such as Senator Elizabeth Warren. If this skepticism continues, schools may find it difficult to attract new students for their ISA programs. Indeed, because there is still relatively low awareness of ISAs, it means schools have an additional burden to dispel any misconceptions about their programs, which will be expensive and time-consuming. There is also a lack of data to suggest ISAs are viable for schools in the long-term. If it turns out ISAs do not function over decade-long periods, they may also fail to disrupt further education financing.
ISAs may also encounter resistance from college administrators. Students will only pay money toward their education after they graduate, and only if they succeed. This would mean many schools with lower outcomes may be pressured to change their offerings; higher education has traditionally been slow in making such changes. Even if there is more demand for ISAs among college students, administrators will still make the final decision about whether an ISA program is offered. And if the school is not performing well — or even has a few majors which have very low outcomes, and has high outcomes in their other majors — they will find it difficult to function with an ISA-based model. The current model of education financing — where schools get money even if a student does not succeed — is preferable for most administrators. That being said, there has been a growing push among lawmakers to introduce more accountability measures. And some colleges are already offering ISAs. Thus, perhaps the extent to which this would be a problem is limited — maybe only a few schools will resist the change, and others will lead the way.
ISAs Could Be Overregulated
Finally, ISAs could be impacted by legislative overreach. The federal government has a poor track record of administering student loans, and the current student loan system is the result of patchwork legislation written by Congress. If Congress and the federal government become too involved in the system, ISAs could fail to reach their full potential. There are a couple of ways this could happen. Firstly, Congress could pass restrictive legislation which fails to take into account the needs of the various schools offering ISAs — vocational schools in many different industries, and colleges. If this were to happen, schools may have to change their offerings to a point where their ISA program is no longer as economically viable as it once was — this may have a direct impact on the revenue of schools, and to a larger extent their ability to function as a school.
Congress could also commission a federal ISA program, which would further inhibit innovation in the space. Indeed, a federal ISA program done right could offer access to ISA-based options for students who are either unable or unwilling to take out a student loan. However, if this program were to replace the traditional student loan system, or grow too big, then ISAs may not be able to reach their full potential. One of the primary benefits of ISAs is incentive alignment. Schools will earn a return proportionate to the success of their graduates. But if the federal government offers an ISA, this incentive alignment will not exist — the agreement is between the student and the government. Although the government could work out a system where new accountability mechanisms were implemented in higher education, the extent to which these would pressure schools to change their offerings would likely be limited.
What Does the Future Hold?
There are many barriers ISAs have to overcome before they disrupt education financing. Perhaps the main issue that would have to be addressed is the lack of legislation governing ISAs. In July 2019, the ISA Student Protection Act was proposed in the U.S. Senate by a bipartisan group of Senators. However, no changes have been made to the bill in the few months after it was initially proposed. Without a strong legislative framework, investors may be hesitant to invest capital into ISAs, schools may resist starting a program out of fear legislation will impact their ISAs, and many students may be unwilling to take out an ISA without adequate consumer protections. Future legislation should also address concerns about the potential of discrimination in ISAs, which have been prominently highlighted by people such as Senator Elizabeth Warren, and in many reports studying the ISA space.
Overall, ISAs have the ability to change further education financing. These agreements could become a more popular alternative to student debt in colleges and universities, especially as more people start to question the merits of taking out a loan to finance their college education. ISAs could also gain more traction in the vocational education space and become the default method of financing. However, ISAs will still have to overcome a lot of barriers. And there is still a chance ISAs will fail to disrupt education financing, especially if Congress passes restrictive legislation which restrains innovation in the space. The future may be uncertain, but either way ISAs will have an impact on the way we think about financing college and vocational training. The question is the extent to which that impact will be realized.
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