Shares in students: nifty finance or indentured servitude?

Archie Hall:

Combine a crisis in college affordability with yield-starved investors and you get one of the more unusual financial products of the past decade: shares in students.

Income share agreements are an alternative to student loans that are gaining ground in the US. From only a handful several years ago, this academic year almost 50 American universities and technical academies offer them. Next year, about 100 will. 

A student funding their education with an ISA gets money upfront in exchange for offering a share of their income after graduation — ranging from nothing if they are unemployed or on a low salary to potentially several multiples of what they received. Graduates continue paying a slice of their income until the ISA expires, usually after about a decade, or when they hit a repayment cap. Risk, in short, is shifted from borrower to lender.

“They might go backpacking for eight years and not pay you a dime, they’d be well within their rights,” said Charles Trafton, president of Edly, a recently-launched marketplace in New York that connects investors with ISA programmes.

ISAs are not a new idea — Yale briefly offered one in the 1970s — but today a group of universities, investors, and start-ups claim they have managed to make ISAs work. If they are right, ISAs could be part of the answer to the mounting US student debt burden, sitting at more than $1.5tn, that has become a central issue for those competing for the Democratic presidential nomination.