Nestled along the San Diego coastline, Point Loma Nazarene University is a world away from Wall Street. But the Christian liberal arts college is at the forefront of financial innovation.
Last fall, Point Loma began offering some of its 4,500 students money to pay for college in exchange for a percentage of their future earnings. The model, known as an income share agreement, requires colleges and students to take a chance on each other, a shared responsibility that attracted Point Loma.
"It sends a message to the student that we're in this with you," said George Latter, vice president of finance and administrative services at Point Loma. "And unlike a grant, you have the prospect of these funds coming back in and creating a revolving form of financing."
Income share agreements, commonly called ISAs, have generated a lot of buzz since Purdue University introduced its program in 2016. A handful of small companies and nonprofits have piloted programs or offered contracts, with the model gaining the most traction with short-term training programs. But traditional colleges and universities have lagged behind. Until now.
Several private colleges are exploring income shares, according to Vemo Education, a Reston, Va., financial services firm that helps create the contracts. In the last month alone, Lackawanna College in Scranton, Pa., and Clarkson University in Potsdam, N.Y., have entered the market.
Some schools — including Point Loma, Lackawanna and Clarkson — are using their own money, while others are working with outside capital. The schools are tailoring agreements to meet the needs of their students, and in the process they are addressing some of the concerns surrounding ISAs.
As adoption of the model expands, it could shift financial aid beyond loans and grants. But some student advocates worry that the concept does nothing to make college more affordable and could prove just as harmful as any other form of debts.
"I'm very concerned if we are saying it's a positive that on top of people coming out with federal students loans to repay, we're going to take another bite out of their income by adding an ISA obligation," said Jessica Thompson, policy and research director at the Institute for College Access & Success, an education nonprofit.
The market for income share agreements is largely unregulated. Two bills were introduced in 2017 in Congress to create a legal framework. They would have capped the maximum amount a student must repay and barred funders from demanding payment when the borrower's income falls below 150 percent of the poverty line ($18,090 for an individual in 2017). Both stalled in committee, but supporters say they advanced the conversation about the importance of regulation to protect students and investors.
Income shares resemble traditional loans in that students are obligated to repay at least a portion of the money they receive. But unlike a student loan, no interest accrues and the obligation ends after a set time.
Imagine two students, each agreeing to pay 5 percent of their income for five years on a $10,000 agreement. If the first student lands a $30,000 job after graduation, he could pay a total of $7,500 by the time the contract is up. But if the second student scores a $60,000 job, she could end up repaying $15,000. Both could pay more if they get raises along the way, which could make an ISA more expensive than a traditional loan.
As a result of the earnings differential, most investors would probably prefer students studying engineering, economics or other lucrative fields, placing those pursuing liberal arts degrees at a disadvantage.
In Purdue's "Back a Boiler" program, students in high-earning majors pay a lower percentage of their income for a shorter period than those with lower earning potential. No student pays more than 2.5 times the amount of money they received and the public college in West Lafayette, Ind., only collects from graduates earning more than $20,000 a year.
The 463 Purdue students who have accepted about $6 million through income shares come from 117 different majors, though most are in science- or math-related fields, according to the university.
"If you're making a bet on students by their major, there's a chance of reinforcing existing inequalities," said Mark Huelsman, a policy analyst at Demos, a liberal think tank. "There are massive racial disparities in returns on a college degree."
He said that African Americans and Hispanics often earn less money than whites in comparable jobs. What's more, minority graduates disproportionately obtain more degrees in low-paying fields, such as education. As a result, income share agreements that place a premium on certain fields could put minority graduates at a disadvantage.
To level the playing field, Point Loma is offering the same terms to all students: 2 percent of their earnings for every $5,000 borrowed and six years to repay the money. Latter said the university identified about 20 seniors who had exhausted federal student aid options before completing their degrees, and offered them up to $10,000 to fill the financial gap.
"The terms on this are pretty good, certainly better than a private loan," he said. "We have a number of students who go into service-oriented jobs that don't always pay well, but we wanted to make sure they'd have the same opportunity as students in higher paying fields."
At Lackawanna, president Mark Volk views income shares as a way to build a self-sustaining form of financing for students with great potential, but modest means. The vast majority of the school's 1,600 students require loans and grants to cover the $15,000 tuition, he said.
Lackawanna, with a $5 million endowment, is not in a position to meet the full financial needs of its students, but the school wants to spare them the expense of having to take out private loans with accruing interest.
"We have a needy population, many are single parents or working adults returning back to school," Volk said. "Having this tool as another way to alleviate the burden of paying for college just makes sense."
Many Lackawanna students are pursuing degrees in health care and energy-related fields with starting salaries above $45,000 a year, so Volk said there is a reasonable assurance they can meet the demands of an income-share agreement. The school is still hashing out the terms for a spring debut, but is considering five- or 10-year repayments at less than 3 percent of a student's income.
While Thompson, the policy director at the Institute for College Access & Success, said having flexible terms is a good practice for income shares, the model is still not ideal for low-income students. Providing grants and scholarships based on financial need is the best way to help students complete their education, and colleges, she said, should use donations earmarked for financial aid to support more need-based grants or emergency scholarships, not to cultivate a debt product.
"A low-income student should not need to borrow more than the maximum federal loan amount to get a quality education," Thompson said. "They're already more likely to owe the most at graduation."
Kevin James, founder of the education nonprofit Better Future Forward, contends that disadvantaged students could benefit the most from income shares because the model lacks many of the risks of traditional loans.
"This is a population that needs new tools more than anybody because they don't have the social insurance that comes from being a part of a higher-income family," James said. "ISAs can be a transformative tool . . . if deployed correctly."
His organization teamed with the nonprofit College Possible to launch a pilot income share program serving 15 low-income college students in Minnesota during the summer. Students must maintain at least a 2.5 grade-point average in any major and be paired with a College Possible academic coach. They can select four-, eight- or 12-year repayment terms and are under no obligation to pay if they earn less than $20,000 a year.
"We want to create broadly accessible funds that are tied to truly solid economic pathways, and those can be traditional college or workforce-oriented programs," James said. "There has been an evolution of the market, but having clear rules of the road will be important to make ISAs scalable and as cost effective as they can be."