How Income Share Agreements Could Play a Role in Higher Ed Financing

Beth Akers:

In response to growing concerns over the issue of higher education finance, policy makers, advocates, and entrepreneurs have developed and proposed an array of solutions to address the shortcomings of our current system. Income Share Agreements (ISAs) are one such proposal that deserves more attention. ISAs allow students to raise funds to pay for their degrees by selling “shares” in their future earnings. This solution is sometimes dismissed as a gimmick, akin to indentured servitude, despite the fact that it has the potential to offer improvements over traditional loans in terms of shielding students from risk and providing information about quality, two widely held objectives among advocates and policy makers.

ISAs are financial instruments that can be administered by the government or by private financial institutions, just like loans, savings accounts and insurance policies. Their defining characteristic is that an individual gains access to capital, cash to pay for college, in exchange for a promise that they will pay back a fraction of their earnings for a prescribed period of time to the entity that administered the agreement. Unlike a loan, where the total to be repaid is known up front, individuals who use ISAs to “borrow” money will pay back an amount that depends on their actual earnings. A graduate who earns less than expected will pay back less than the full amount of the initial funding, while graduates who earn more than expected will pay back more than their share. ISAs are not broadly used in the United States, but are being used in a few particular settings, including trade schools that train web developers in exchange of 18% of their first-year income, and a non-profit who funds low-income students in California.