ISAs are a smart experiment for dealing with student loan debt crisis
DevCodeCamp, a 12-week software engineering boot camp in Milwaukee, announced last month that students could attend without paying tuition or taking out student loans. How? For the first time in Wisconsin, students at devCodeCamp can sign an income-share agreement, or ISA. Such agreements are a bet on a student’s future success in the workplace. Students who sign an ISA with devCodeCamp pay no tuition and incur no debt. Instead, they agree to pay back 15 percent of their future earnings for three years, not to exceed $30,000. Better yet, students make no payments until they earn at least $40,000.
Though the idea dates to the 1960s, income-sharing caught on in 2016 when former Indiana Gov. Mitch Daniels launched an ISA program at Purdue University. ISAs give an institution of higher learning a direct stake in a student’s future success, altering the current incentive structure. Instead of large loans with high interest rates that make no distinction between the likelihood of a given student’s expected career success, ISAs mean students pay no tuition while in school but agree to pay back a percentage of future earnings for a standard amount of time.
Students who find quick success and high earnings are protected by a guaranteed maximum payback. Once they hit the threshold, their obligations are complete. But the real benefit may be for those who do not earn that much out of college. With large student loans, students can feel pressured to chase earnings, not necessarily their passions. With an ISA, students who choose to teach or work at nonprofit organizations have the benefit of making a manageable and defined payment — that is, in many cases, less than a typical student loan.
Purdue, where Daniels is president, is the most prominent institution to experiment with ISAs. The “Back and Boiler” income share agreements allow students to fund a year or two of their education after they have declared a major and have proven they are keeping up academically. The amount and the percentage of future earnings owed by students depends on their major and the likelihood of career success. Students agree to pay back the university or its research foundation for 10 years with a maximum payment cap of 2.5 times the amount received.
ISAs are still relatively small in scale and it isn’t quite clear if they will be a successful model for all students or the institutions that offer them. Furthermore, there is some lack of clarity on how ISAs fit into the current legal and tax framework. A bipartisan bill in Congress could clarify some of these questions, potentially opening the door for more schools to offer ISAs.
What income share agreements represent is an alternative financing mechanism that is better for students and more responsive to the demands of the labor force. Paying a fixed percentage of income without debt is, in many ways, far better than the current arrangement where students leave college owing what amounts to a small mortgage. The agreements also could provide a valuable incentive for students and institutions to steer curriculum towards the skills and education that best meet the demands of the labor market.
If post-secondary education is a ticket to the middle class, the price of that ticket is getting out of control. Just ask the 44 million Americans that have accrued $1.5 trillion in student loan debt with an average monthly payment of $393. The deep plunge into the red has had documented consequences for marriage, home buying and fertility — delaying or forgoing critical milestones of adulthood for an entire generation.
Policy responses that aim only at loan forgiveness or refinancing do little to make institutions of higher learning more responsive to the problem of burdensome student loan debt. ISAs do. And that makes ISAs a worthy bet and an important experiment.