Why a Novel Way to Pay for College Appeals to Conservatives

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Income-share agreements, in which investors help finance students’ educations in return for a percentage of their earnings, have become a hot idea in some corners of higher education. Especially conservative ones.

Take Mitch Daniels, the former Republican governor of Indiana who now leads Purdue University. This fall Purdue started offering the agreements, which are known as ISAs, to its upperclassmen. The policy wonks writing about the benefits of income-share agreements are mostly conservatives. Efforts in Congress to create a legal structure for ISAs have included a bipartisan bill, but the first proposed legislation came from two Republican lawmakers.

“I don’t know of a single person who identifies as a liberal” who has advocated for creating a regulatory framework for ISAs or likes the concept in general, says Beth Akers, a senior fellow at the Manhattan Institute, a free-market think tank. So what makes the idea of income-share agreements particularly appealing to conservatives?

First and foremost, Ms. Akers says, the concept “addresses a problem in higher education” — students’ need for both financing and risk protection — “but it does so through the private markets instead of the federal government.” That, of course, appeals to small-government advocates.

But the appeal of a private-market solution is not the whole story. Jeb Bush released a higher-education plan during the Republican presidential primary campaign that would have created a government program that looked “almost exactly like a federally administered ISA,” Ms. Akers says. Mr. Bush’s plan would have replaced the existing federal student-loan program with a $50,000 line of credit that students could use to pay for their education and would repay based on their income after college.

Democrats have supported another model that’s similar to income-share agreements: “Pay it Forward,” in which a state, rather than investors, provides the financing.

Those related ideas for financing college have been much discussed among policy experts. Still, the proposals remain unfamiliar and unintuitive to many others, including most students and families. One common reaction to income-share agreements is that they sound like indentured servitude. A less-drastic one is that investors would fund only elite students. (Proponents of these ideas see both of those perceptions as myths). And some who understand the idea fully still worry about whether ISAs would be designed with sufficient consumer protections.

Income-share agreements tie investing in a college education directly to how that investment pays off in the job market. That’s a link not everyone is comfortable dwelling on, says Alexander Holt, a policy analyst at New America who recently conducted focus groups to see what students and parents make of ISAs. “Conservatives are probably more willing to acknowledge,” he says, “that higher education, for most people, is about earning a higher income.”

ISAs, Mr. Holt says, align what people pay for college with how well it pays off. It’s a similar philosophy, he says, to progressive taxation — something one would expect Democrats to support. Ms. Akers agrees. She recalls explaining income-share agreements on a liberal talk-radio show. The host described the agreements, she says, as a transfer from the “haves” to the “have-nots” — and wondered aloud how to get conservatives on board with them.

So why don’t liberals appear to be much interested? Ms. Akers cites a deeper philosophical difference. To conservatives, she says, ISAs are an “elegant” way for people to invest in their own educations. To liberals, it’s not a given that students are the ones who ought to be making that investment. That’s what the free-college debate during the Democratic primaries was all about — the notion that education’s benefits extend beyond the individual student, making it worthy of increased public support. Finding an arguably better way for students to invest in themselves avoids the question of who ought to be paying.

Michelle Asha Cooper, president of the Institute for Higher Education Policy, likes that people are thinking up creative solutions to finance a college education. Still, she says, “if we’re going to tackle the problem of college affordability, we have to tackle it on the front end versus the back end.” ISAs don’t reduce what college costs, in other words. They simply give students another tool for financing that cost.

‘It Feels More Purple’

As the chief operating officer at the Purdue Research Foundation, Brian Edelman spends a lot of time explaining income-share agreements. That entails clearing up misconceptions, he says, like the notion that ISAs require a one-to-one relationship between investor and student. (In Purdue’s program, students get money from a group of investors through a fund managed by the research foundation.) “It’s not an investor doing a Shark Tank interview with a student,” he says, referring to the television show that features entrepreneurs pitching their fledgling businesses to deep-pocketed venture capitalists.

After spending a day in September on Capitol Hill meeting with lawmakers on both sides of the aisle, Mr. Edelman was encouraged that once the product was better understood, it could find bipartisan support. “It feels more purple,” he says, “than it does red or blue.”

But Mr. Holt, for one, worries that too much attention from the right could kill the chances for ISAs to gain bipartisan appeal. “This is going to get traction in the next Congress,” he says, “but it’s going to get traction from Republicans.”

On top of that, Mr. Holt says, “when people start talking too much about private capital, it can sound more partisan than it really is.” Any resurrection of Mr. Bush’s plan, he adds, could enhance that perception. And while Mr. Holt and other experts see income-share agreements as a supplement to the federal student-loan program, giving students an alternative to private loans, he fears the tool could be viewed incorrectly as a replacement for the existing federal system. That would definitely make it a partisan issue.

Still, Mr. Holt, who identifies as a conservative, thinks that Democrats should take the idea seriously. His pitch? “These are far more protective to students than private student loans,” he says. ISAs could be designed with clearer regulatory guidelines and better consumer protections than are the private loans that many students rely on today. With an ISA, Mr. Holt is fond of saying, students don’t know what their payments will be, but they know that they will be affordable. With a conventional private loan, payments are predictable, but students’ ability to make them is not.

But buy-in from Democrats is far from a given. “My nightmare scenario,” Mr. Holt says, “is Elizabeth Warren” — the Democratic senator who pushed for creating the Consumer Financial Protection Bureau — “says one day these are indentured servitude, and that’s it.” (Senator Warren’s office did not respond to a request for comment.)

Income-share agreements can be difficult to understand for those new to the concept. Mr. Holt’s focus groups found that parents had trouble, for instance, wrapping their minds around a financing product that does not have an interest rate.

Part of the challenge is a lack of examples of income-share agreements for advocates to point to, says Kevin James, director of higher education at the Jain Family Institute, a think tank focused on social change that has taken a keen interest in ISAs. The institute advised Purdue on its program. It hopes to get more examples of income-share agreements off the ground, especially at colleges with a needier student population, says Mr. James, who has been interested in them since working for Rep. Tom Petri of Wisconsin, a now-retired Republican who co-sponsored the initial bill to provide more legal clarity around ISAs.

While there are private companies offering ISAs in the United States, as well as at least one working mostly in Latin America, there’s just one high-profile example underway: Purdue’s “Back a Boiler” program.

And that program is still in its early stages: Purdue began making ISAs available only this fall. Back a Boiler is open to juniors and seniors at the university, and so far about 150 are participating, says Pam Horne, vice provost for enrollment management. The students represent a diverse mix of majors (students face different terms depending on what they’re studying), Ms. Horne says, and about 45 percent are Indiana residents. The students — who are using ISAs on top of financial aid — took an average of $13,000 for the year, she says. It will be a couple of years before the university will have an idea of what kinds of payments former students are making and whether the program seems to be working out financially, Ms. Horne says. For now, it can answer one preliminary question: There is student interest in this kind of financing.

Amy M. Wroblewski, a junior, is part of the first batch of Back a Boiler students. She learned of the program watching the news with her family, Ms. Wroblewski says, and while her father was immediately enthusiastic about the idea, it took her a while to find anyone on the campus who could tell her more about it.

This year, Ms. Wroblewski is using the income-share agreement in lieu of a private loan. She found the process much easier, and the customer service better, she says. When she called with a question about her ISA, “they were extremely helpful,” she says, unlike her lender, which she had to call multiple times to get a person on the phone. Another advantage of Back a Boiler: It does not require a co-signer, a relief to Ms. Wroblewski, whose father couldn’t work for six months after an injury and has since taken a pay cut.

Whether more students will respond to income-share agreements, as Ms. Wroblewski has, is just one of many open questions about them. How far ISAs spread, of course, will also depend on the regulatory climate for those who provide them. And that, in turn, may hinge on whether they can win bipartisan support.

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.