Blog

Income share agreements’ could help more students avoid debt – with the right regulation

By / 5.21.2018

Students, policymakers, and members of the American public have increasingly acknowledged the crippling impact of student loans for many college graduates. In response, a growing number of schools are offering an alternative financing option to students: so-called “income share agreements.” Instead of taking out a loan and paying it back over time with interest, students with income share agreements (ISAs) commit to pay a fixed percentage of their income for a specified number of years after graduation in exchange for tuition. Under these agreements, graduates may end up paying more than or less than the total amount of funding they received in the first place — their obligation depends on their income.

Although ISAs are still relatively uncommon in the higher education landscape, they are gaining traction with an increasing number of colleges. The most notable participant so far is Indiana’s Purdue University, whose “Back a Boiler” program uses philanthropic donations and funds from the school’s endowment[1] to offer ISAs to hundreds of students. So far, the school’s ISAs have totaled more than $6 million in financing.[2] Other schools endorsing income share agreement programs include Point Loma Nazarene University in California, Lackawanna College in Pennsylvania, and Clarkson University in New York.[3] In addition to colleges and universities, career-focused institutions such as coding schools are also adopting the model.[4]

ISAs are funded either directly by the school or administered by third-party companies such as the Virginia-based start-up Vemo. Proponents say that ISAs give colleges “skin in the game” as far as how their graduates fare after school, because they have an incentive to ensure that students obtain well-paying jobs. The same is true for ISA companies such as Vemo.[5]

But as interest in ISAs grows, there is so far very little legal guidance as to how these agreements should be structured. With more private investors entering this space, public policy should protect participants from unfair terms and facilitate clear, legally legitimate agreements between funders and students. Setting reasonable regulations around income share agreements would also help to develop a robust market for this product and ensure that “bad actors” don’t cripple the market for ISAs before it takes root.

A promising proposal to set a regulatory framework for ISAs is the bipartisan “Investing in Student Success Act of 2017” (S.268), sponsored by Sens. Marco Rubio (R-FL) and Todd Young (R-IN) in the Senate and its companion bill, the “ISA Act of 2017” (H.R.3145), sponsored by Reps. Luke Messer (R-IN), Jared Polis (D-CO), Trey Hollingsworth (R-IN), Jackie Walorski (R-IN), Erik Paulsen (R-MN), Jim Banks (R-IN), Krysten Sinema (D-AZ), and Randy Hultgren (R-IL) in the House. Both bills establish standardized terms for an ISA, including the percentage of income and duration of payment required of the graduate, terms for potential prepayment, and an explicit definition of income. Requirements such as these will ensure the creation of a uniform financial product with legal certainty for both students and institutions.

The Senate and House proposals also establish some protections for graduates regarding their ISA payments. The bills establish a “maximum commitment factor” of 2.25, which is calculated by multiplying the percentage of income required in the ISA contract by the number of years left in the agreement. By capping commitment in this manner, the legislation would prevent lenders from requiring both a very high percentage of income and long duration of payments from graduates. The bills also dictate that graduates will not be required to make any payments during periods of time when their incomes fall below a certain level ($15,000 adjusted for inflation annually in the Senate bill; 150 percent of the poverty line for a single person in the House bill). This is a key component in why ISAs are an appealing financing option for many people: during sustained periods of financial hardship, graduates are protected. The bills also establish an overall maximum commitment level for students who might have multiple ISAs (e.g. for undergrad and graduate school).

While a good start, the bills could also include explicit protections from discrimination in the administration of ISAs. While proponents argue that ISAs would allow more minority and low-income students to be able to afford higher education, skeptics argue that ISA investors could still find ways to discriminate against certain students. Specifically, “one of the major arguments against ISAs is that private investors could refuse to fund certain high-risk pools of students, such as minorities, first-generation students or those pursuing lower-paying careers.”[6] Again, regulation is key here. Through clear terms in legislation, Congress could set expectations about which students can get ISAs on what terms. By emphasizing forward-looking prospects after graduation, ISA requirements can more effectively support students coming from many different backgrounds.

ISAs are not a silver bullet for solving the problem of college affordability. For this reason, PPI has also proposed a “College Finance Innovation Fund” which can help test, evaluate, and bring to scale innovations such as ISAs — as well as other new ideas that emerge. Among other things, such a fund could help support research to examine who gets ISAs on what terms, how these programs impact the ability of low-income students to build a credit history,[7] and what implications ISAs have for the diversity of the federal loan portfolio.[8]

In the meantime, students are eager for alternatives to traditional student loans, and ISAs offer a promising way to help many young people supplement or replace their existing funding for school. Smart regulation can help ensure that ISAs live up to their potential.


[1] Allesandra Lanza, “Alternative to Student Loans: Income-Share Agreements,” US News & World Report, 2018, https://www.usnews.com/education/blogs/student-loan-ranger/articles/2018-01-24/alternative-to-student-loans-income-share-agreements.

[2] Danielle Douglas-Gabriel, “A new way emerges to cover college tuition. But is it a better way?” Washington Post, 2017, https://www.washingtonpost.com/local/education/a-new-way-emerges-to-cover-college-tuition-but-is-it-a-better-way/2017/12/31/6519d100-d9c9-11e7-b859-fb0995360725_story.html?utm_term=.453e57d3eee3.

[3] Danielle Douglas-Gabriel, “A new way emerges to cover college tuition. But is it a better way?” Washington Post, 2017, https://www.washingtonpost.com/local/education/a-new-way-emerges-to-cover-college-tuition-but-is-it-a-better-way/2017/12/31/6519d100-d9c9-11e7-b859-fb0995360725_story.html?utm_term=.453e57d3eee3.

[4] Frank Chaparro, “Investors are paying college students’ tuition — but they want a share of future income in return,” Business Insider, 2017, http://www.businessinsider.com/income-share-agreements-help-students-pay-for-college-loan-alternative-2017-3.

[5] Amelia Friedman, “Why One University Is Sharing the Risk on Student Debt,” The Atlantic, 2017, https://www.theatlantic.com/education/archive/2017/03/why-one-university-is-sharing-the-risk-on-student-debt/519570/.

[6] Allesandra Lanza, “Alternative to Student Loans: Income-Share Agreements,” US News & World Report, 2018, https://www.usnews.com/education/blogs/student-loan-ranger/articles/2018-01-24/alternative-to-student-loans-income-share-agreements.

[7] Michael Horn, “Profiling the Rise of Income Share Agreements in Higher Ed,” Forbes, 2017, https://www.forbes.com/sites/michaelhorn/2017/06/15/profiling-the-rise-of-income-share-agreements-in-higher-ed/#14a4108c5fee.

[8] Clare McCann and Sophie Nguyen, “Income Share Agreements Aren’t a Solution to Student Loan Debt,” New America, 2017, https://www.newamerica.org/education-policy/edcentral/income-share-agreements-arent-solution-student-debt/.