They’ve captured the imaginations of a small number of companies, think-tank scholars, and members of Congress. But until recently, income-share agreements hardly seemed poised to go mainstream in the United States.
That could be changing, though. Purdue University plans to start offering the agreements — in which investors help finance students’ educations in return for a percentage of their income — as soon as next semester. Last month the Purdue Research Foundation, where the program would be housed, announced that it had signed a letter of intent to further explore income-share agreements with Vemo, a company that works to design and carry out ISA programs for colleges.
Details of how the university’s program would be structured are still being sorted out. In the meantime, let’s tackle some questions you may have about the program’s broad outline and goals:
Is this the “Bet on a Boiler” program I’ve heard about?
Yes, but the university has moved away from calling it that. Student-government members who attended an informal focus group this fall were presented with several possible names for the program, said Brian E. Edelman, chief financial officer and treasurer of the Purdue Research Foundation. The one they liked best, he said, was “Back a Boiler.”
Students didn’t like the connotations of the word “bet,” said Sheriff Almakki, a junior. “I wouldn’t want people to bet on me.”
How would the program work?
Students who signed up would enter a contract with a group of investors who would pay for a portion of their education. In return, the students would pay a set percentage of their income (above a minimum to subsist on, and probably up to a cap) for a certain number of years. The payoff would depend on the income performance of a pool of graduates, much as mutual-fund investors win or lose based on the collective performance of individual stocks.
Why is Purdue doing this?
University officials characterize the program as part of a broader affordability push and ISAs as one tool that can help students. The agreements aren’t right for everyone, the university has been careful to say. And they’re not meant to be the main way students pay for Purdue, nor the first resource students would use to do so.
Instead, income-share agreements could fill any gap between the full cost of attendance and students’ own money, scholarships, and federal loans. They would be an alternative to the financing that often fills that gap now — private or Parent PLUS loans.
Student and consumer advocates don’t love those existing options. They can be quite expensive, and private loans usually don’t offer the level of protection, including fixed interest rates and income-based repayment options, that federal loans for undergraduates do. Traditional private loans are also harder to come by for students whose families are in worse financial shape. ISAs, on the other hand, would be disconnected from the financial picture of a student’s family, and would link payments to what graduates could afford to pay.
How much demand is there for a program like this at Purdue?
Purdue graduates leave with a bit less debt than the national average. Forty-eight percent of the 6,655 students who graduated from Purdue in 2014-15 had student-loan debt, an average of $27,711, Pamela T. Horne, vice provost for enrollment management, said in an email. But no one is suggesting ISAs would replace all student debt — the target is private loans, and the PLUS loans held by parents (and therefore not included in the average debt figure for students).
Twenty percent of the new graduates had private loans, an average of $15,099, Ms. Horne said. Thirty-nine percent of the graduates’ parents borrowed through PLUS, with an average of $16,437 at the point of the child’s graduation. That suggests that including ISAs in the mix could make a difference in how these sizable minorities of students pay for Purdue.
Given the university’s size, there could be a significant market for the agreements, if students do in fact prefer them. Purdue’s 29,000 undergraduates (those enrolled in the main campus and technology sites, but not the branch campuses) take out about $20 million a year in private loans, Ms. Horne said in an interview. Those are just the private loans Purdue knows about — it can track only the ones that students certify. For that same student population, Ms. Horne said, parents take out some $40 million in Parent PLUS loans per year.
What would the contracts look like?
That’s the big question. Purdue hasn’t yet shared the basic terms: what percentage of income students would pay, for how long they’d pay it, and how much of their income would be protected.
Observers expect that Purdue might offer different contracts to different students, but the university hasn’t confirmed that yet, either.
The obvious way to vary contracts is by program of study, since graduates in different majors have different earnings trajectories. For example, the program might offer engineers a contract that requires them to pay back a smaller percentage of their income than would be required of English majors. While that arrangement might seem unfair, advocates say, the goal is to make the program more equitable. Otherwise someone with higher expected earnings might avoid the program entirely.
Another way contracts could vary is by year of study. A student who’s closer to finishing a degree presents two advantages to investors: She’s more likely to graduate, and she’s closer to making her first payment. As a result, a student might get an ISA on better terms as a senior than she did as a freshman.
No one really knows yet what kinds of terms would most appeal to students, said Kevin J. James, a research fellow with the Center on Higher Education Reform at the American Enterprise Institute, so contract design is ripe for experimentation. Purdue could even offer individual students more than one contract to choose from.
Ultimately, whether or not ISAs are a good idea for students depends entirely on how the contracts are structured. “ISAs, if designed well with appropriate safeguards, could be a good alternative to a private student loan,” said Rohit Chopra, a former student-loan ombudsman for the Consumer Financial Protection Bureau. “But the devil is in the details.”
Will students understand the details of the contracts? And what do students think of the program?
Plenty of students don’t know what they’re getting into with traditional loans, and ISAs can be a bit tricky to think though, so pretty much everyone agrees that good disclosures and financial counseling are key. “I wouldn’t want students to have to have a Ph.D. in finance in order to understand it,” said Mr. Chopra, who is now a senior fellow with the Center for American Progress.
The way ISAs are designed makes it impossible to know in advance what one’s monthly or total payments might be. That said, Purdue could provide students with a few different scenarios that show how payments could compare to those for a traditional loan at various projected incomes.
Advocates of ISAs like the fact that they encourage students to consider payment and postcollege income together, while traditional loans really don’t.
It’s hard to say what students think of the program, since so few of them seem to know much about it yet. An article describing faculty members’ concerns was published in the student paper in late October. But Alexa Kozyrski, who wrote it, said she didn’t hear much student discussion after it ran.
When Mr. Almakki, the junior, first heard about the program, he thought it sounded “somewhat sinister,” he said. The focus group changed his mind. “In my opinion it could be good for students,” he said. But he still has some concerns. One is that potential scholarship donors will put their money into ISAs instead. Another: that it could make college more like a business and less like a social institution.
What do faculty members make of this?
As you might expect, reaction has been mixed, and some professors are dubious. Chief among them appears to be David A. Sanders, an associate professor biological sciences and vice chair of the University Senate.
Mr. Sanders worries about students’ ability to make informed choices. Most of his students are successful people, he said, but “making financial decisions about their future is not necessarily one of their strengths.”
And Mr. Sanders worries that students in some majors won’t have access to ISAs, or would be presented with less-generous terms than their peers would. “I’d like to see what the agreements actually look like,” he said. “I don’t think anyone will be pricing these to lose money.”
The head of the University Senate, Kirk Alter, was skeptical of the program when he first learned of it, he said. But now “I would classify myself as a moderate” on the issue, said Mr. Alter, an associate professor in the School of Construction Management Technology. The ISA program, he said, is something for faculty members to carefully consider as it develops. “I’m satisfied with the idea it’s a pilot,” Mr. Alter said.
How will Purdue evaluate the program’s success?
The first question is whether a pilot actually gets off of the ground. If it does, student interest is the next thing to track. But that will be a measure of how well Purdue communicated the program, said Mr. Edelman, the foundation’s CFO, not whether or not it works. To figure out that key question, the university will have wait until it can analyze payment data.
The Purdue project has the potential to “demonstrate how these things could work” in general, said Beth Akers, a fellow with the Brown Center on Education Policy at the Brookings Institution who’s been closely following the discussion of ISAs.
The ultimate sign of the Purdue program’s success would be if others seize the idea and begin using it on a much larger scale. That’s unlikely to happen overnight, Mr. Edelman said. But if and when it does, he said, the pricing of ISAs could be a powerful signal to prospective students wondering how their options stack up economically — one Purdue expects would only help it attract them.
Beckie Supiano writes about college affordability, the job market for new graduates, and professional schools, among other things. Follow her on Twitter @becksup, or drop her a line at beckie.supiano@chronicle.com.
