Several prominent Republicans have proposed colleges buy shares in students' future earnings to finance 'debt-free' degrees—and Purdue University announced such a program last week, Danielle Douglas-Gabriel reports for Washington Post's "Gradepoint."
How it works
So-called income share agreements (ISA) allow investors to front the cost of college in return for a share of graduates' future earnings. In theory, the agreements go further than income-based repayment plans for student loans by shifting more of the risk onto colleges and investors: If students don't graduate or go on to earn money in the labor market, investors—whether they be a college or a private firm—don't make their money back.
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Presidential candidate Sen. Marco Rubio (R-Florida) supports ISAs and introduced legislation last year that caps payments at 15% of income and sets the maximum terms of agreements at 30 years. In August, Mitch Daniels, a former governor of Indiana and Purdue's current president, wrote a Washington Post op-ed arguing ISAs opened a path to "true 'debt-free' college."
Now, Daniels is bringing ISAs to Purdue via a partnership with Vemo Education, a financial service firm. Under an agreement announced last week, the school will create ISA funds that students can use to pay for tuition, room, and board. "In return, students would pay a percentage of their earnings after graduation for a set number of years, replenishing the fund for future investments," Douglas-Gabriel explains.
The terms of the ISA agreements will be handled by Vemo and two nonprofits: 13th Avenue Funding and the Jain Family Institute.
What if colleges borrowed money to pay for student tuition?
As Daniels argued in August, the agreements could radically shift how colleges and students think about career outcomes by shifting the financial risks of a degree from students to investors. "If the student decides to go off to find himself in Nepal instead of working, the loss is entirely on the funding providers, who will presumably price that risk accordingly when offering their terms," he wrote.
But is it really that simple? Douglas-Gabriel notes in some circumstances graduates could end up paying more for college over the long-term than if they had opted for traditional loans. And deciding if an ISA is a good deal depends on having a good sense of what your long-term earnings will be after graduation.
According to Douglas-Gabriel, some critics worry students interested in profitable degrees will get more favorable ISA terms than those interested in less lucrative fields like education or nursing. It also is not clear how ISAs will be regulated.
Tonio DeSorrento, CEO at Vemo, says it's easier to "meet both investors' and students' needs if you fund people in groups." For instance, Vemo could structure the ISAs so students with similar majors have similar financial terms (Douglas-Gabriel, "Grade Point," Washington Post, 11/27; Daniels, Washington Post, 8/20).
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