Robert F. Kennedy used to observe that all progress depends on change, and change always has its enemies. Occasionally, a new idea can be menaced not just by its foes but also by its friends. So it is with the income share agreement, or ISA, a partial response to the bleak outlook regarding student loan debt.
In an ISA, a student borrows nothing but rather has his or her education supported by an investor, in return for a contract to pay a specified percentage of income for a fixed number of years after graduation. Rates and time vary with the discipline of the degree achieved and the amount of tuition assistance the student obtained.
An ISA is dramatically more student-friendly than a loan. All the risk shifts from the student to the investing entity; if a career starts slowly, or not at all, the student’s obligation drops or goes to zero. Think of an ISA as equity instead of debt, or as working one’s way through college — after college.
By contrast, student debt sits there and compounds, whether a borrower does well or poorly in the working world. Every day we read of young people — and some not so young anymore — who got behind on their loans and may never catch up.
Not surprisingly, the ISA concept has attracted plenty of interest. At Purdue, the university I lead, hundreds of students have such contracts in place, and other colleges large and small are joining the ISA movement. Beyond traditional higher education, coding academies and other skill-specific schools are making the same offer: Study for free, and pay us back after you get the good job we are confident you’ll land.
Although the very nature of ISAs protects the participant, early adopters such as Purdue have built in safeguards. A user-friendly computer simulator provides quick, transparent comparisons with various public and private loan options. No investee pays anything for the first six months after graduation or until annual income exceeds $20,000. For those graduates who get off to fast career starts, a ceiling of 250 percent of the dollars that purchased their education limits total repayment. One of the rare issues drawing broad bipartisan support these days, ISAs are the subject of pending legislation in Congress that would enact similar boundaries.
We never recommend an ISA in lieu of taxpayer-subsidized federal loans — you can’t beat their artificially low rates — but compared with higher-interest private loans or federal “parent-plus” loans, they are often far preferable. And they always carry the advantage of shifting the risk and fixing the payment obligation at an affordable share of income.
ISAs have emerged principally in response to the wreckage of the federal student debt system but they also represent an opportunity for higher education to address another legitimate criticism: that it accepts no accountability for its results. As the lead investor of the two funds Purdue has raised to date, our university is expressing confidence that its graduates are ready for the world of work.
One of many ironies in the higher-ed world is that so many people who style themselves as modern or “progressive” are reflexively reactionary at the first scent of a new idea or a change in business as usual. Objections to ISAs span the spectrum from sophistry to silliness.
Facts or logic being unavailable, critics of ISAs often resort to name-calling. A favorite is “indentured servitude,” an enjoyably ironic brickbat because servitude is a good description of federal student loans, which keep growing regardless of life circumstances and are difficult to escape even in bankruptcy. My personal favorite attack came from a former Obama administration education adviser, who, stumped for anything rational to tell the Wall Street Journal about ISAs a few years ago, fell back on “It feels icky to me.” Got me there, pal.
It’s no surprise when lifers in any sector leap to quash a new idea that challenges either their credentials or profits. But the ISA could also fall victim to the well-intentioned embrace of its new fans. The Education Department, noting ISAs’ many advantages, has talked about offering its own version of the agreements. Advocates of the programs appreciate the affirmation, but we worry about becoming friendly-fire casualties if the federal government decides to become a competitor. Uncle Sam nationalized student lending a decade ago, and we’ve all seen how well that worked out.
The best test of an innovation is its acceptance and performance in the marketplace. Whether strangled or hugged to death, a young innovation trying to grow is always at risk of asphyxiation. Here’s hoping that both enemies and frenemies will stay their busy hands and allow income share agreements, and perhaps even better ideas, a chance to try to improve the financing of higher education.
Correction: A previous version of the column incorrectly stated that federal student loans cannot be discharged in bankruptcy. This version has been updated.