By Samuel Leadley
It is widely known that the cost of attending college in the United States has dramatically increased in the past few decades. Presently, the average cost of attending college ranges from $25,890 for a public four-year college to $52,500 for a private non-profit four-year college. This represents a 205.65% and 110.64% increase in costs respectively, adjusted for inflation, since 1988. The impact of the increase has disproportionately affected low-income families and exacerbated inequality. This economic barrier has denied countless families the ability to send their children to college or caused students take on excessive amounts of debt. Although the cost of being denied a higher education is not expressly quantifiable the cost of assuming high levels of student loan debt is.
Total student loan debt has ballooned in the past decade totaling more than 1.4 trillion dollars. Student debt is one of the only forms of debt that is not forgiven, even in the event of bankruptcy, representing a serious burden to borrowers. According to a national survey report done by Summer and Student Debt Crisis, 88% of borrowers struggle to make their payments and 65% of borrowers reported having less than $1,000 in their bank account. The debt limits individuals’ choice, opportunities, and control over their own lives. The current system for financing higher education is neither sustainable nor fair. Luckily, an alternative solution to financing college is gaining prominence: income share agreements or ISAs.
In its simplest form, ISAs allow students to attend college and then pay back a fixed percentage of their earnings after college for an agreed upon number of years after graduation. However, the terms of these agreements vary depending on who is offering them and are often not very simple. ISAs are mainly offered by private organizations and colleges, but governments have also shown interest in providing them as an alternative to student loans.
ISAs provide several advantages. Students who take this approach to financing are no longer saddled with debt and monthly payments that often exceed their income because an ISA only takes a percentage of monthly income. Moreover, ISAs are not as strict about repayment as traditional student loans and the capital risk is placed more on the investor than the student. ISAs also provide individuals from low-income families a financing option that takes into account future income and not just past financial performance like credit ratings. Additionally, unlike student loans offered by the government which have the same terms rate for all borrowers ISA providers can adjust terms to more accurately reflect the risk being bore by the provider of capital. For example, a student planning on studying engineering can negotiate a lower repayment rate or shorter repayment term than a student planning to study art history. This however highlights one of the criticisms of ISAs.
Critics argue that ISAs will predominantly support students who seek to get a degree in high-paying fields like finance and engineering and not to other degrees which are less economically viable but still valuable to society like a Master of Social Work. This is because investors are more likely to fund students they think will generate a larger return for their capital. Like with any financial product some investors may use ISAs in a predatory manner by offering less savvy recipients terms that generate unnecessarily large returns at the expense of the student. Modern ISAs are still early stage products so only time will tell if they will be used for social good or will turn into another burdening financial product.
