As Students' Debt Mounts, a New Method of Repayment Emerges

“Income share agreements” could lower loan payments and the financial risks of paying for college.
March 2019
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By Anne Kim  |  Columnist
Vice President of Domestic Policy at the Progressive Policy Institute

An ambitious group of seniors from Oregon’s Portland State University devised a creative plan in 2012, dubbed “Pay Forward, Pay Back,” to deal with spiraling college costs and student debt. In exchange for deferred tuition, students would contribute a chunk of their post-graduation earnings to a fund for future students, ultimately creating a self-perpetuating pool of aid passed from one generation to the next.

Unfortunately, Pay Forward, Pay Back quickly hit the wall of fiscal reality. Despite the embrace of legislators, the state’s Higher Education Coordinating Commission concluded that the deferred tuition plan was unaffordable, costing as much as $20 million a year for 20 years to benefit just 1,000 students annually.

Yet interest in new ways to finance college remains very strong, especially as average in-state tuitions at four-year public universities have roughly tripled since 1998, total student debt topped $1.5 trillion in mid-2018 and state grant aid has stayed flat.

Rather than look to public money, however, some states are exploring novel alternatives to traditional student debt, ideas that would rely on private and philanthropic financing. Of particular interest are so-called income share agreements (ISAs), which proponents argue has the sex appeal of Pay Forward, Pay Back, but poses less risk to the public purse. Six states considered ISA-related legislation in 2018, according to the Education Commission of the States. In 2019, California could launch the nation’s first statewide ISA pilot.

Perhaps the nation’s best-known ISA program so far is a private one. Purdue University’s Back a Boiler program, begun in 2016, allows students to get a grant toward tuition. The grant is to be repaid as a fixed share of post-graduation income for a certain number of years, depending on major and projected earnings. For example, a computer science major with a $26,000 ISA grant would pay 7.3 percent of his or her income for seven years. If this student makes the expected median salary, total payments should be slightly cheaper than a traditional student loan. 

The biggest benefit, though, is if the student’s career plans don’t pan out or the economy craters. Under a traditional loan, interest and principal would accrue regardless of borrower hardship. But ISA holders are unburdened by that risk. “This idea of shifting risk from student to school is one of the beautiful ideas behind ISA,” says Mary Claire Cartwright, vice president of information technology at the Purdue Research Foundation, which administers Back a Boiler. “We’re telling students, ‘You’re going to get a great job when you graduate, and if you don’t, we’re here to catch you.’”

So far, Purdue has issued $6.5 million in ISA contracts to more than 750 students, many of whom, Cartwright says, are first-generation students. And according to tech startup Vemo, which administers ISAs, more than 30 universities now have them, as do coding boot camps and trade schools.

While ISAs and other innovations are no silver bullet, states could benefit from experimenting with loan alternatives. First, they could expand their arsenal for making college more affordable, especially if lean budgets disallow expanding grant aid. Second, states could benefit from graduates’ economic success if schools have an incentive to ensure students get jobs to pay back their commitments.

In California, a bill by Republican Assemblyman Randy Voepel to establish an ISA pilot at the University of California system failed to make it past the state Senate last session, but unanimously passed the Assembly. Supporters are optimistic, and its success could pave the way for other state experiments. Federal legislation to recognize and regulate ISAs also enjoyed bipartisan support last Congress and is set for reintroduction this year as well. All this could mean good news for future students.