For the past eight months, Congress and the Biden administration have explored ways to reduce the burden for current and former college students mired in debt. Nearly 45 million Americans have college debt — a combined $1.73 trillion, a number that has grown significantly in that time despite a marked decrease in enrollments last year and significant emergency relief from the federal government.
Congress paused debt repayment obligations shortly after the pandemic began, and it has been extended several times. It is currently set to expire in January. Members of Congress also have been exploring other ways to provide students some modicum of relief; for example, the current iteration of the budget reconciliation bill calls for making community college free and boosting the size of Pell Grants.
The problem is that it is not clear that either of these will do much to reduce student debt or increase college affordability. The focus on college also neglects the majority of the American workforce, many of whom are seeking ways to afford postsecondary opportunities to acquire practical training, certification or a professional degree, none of which necessarily will be made more accessible by anything that’s currently in the 2022 budget.
However, new initiatives have arisen that do show promise in making such educational paths more affordable. A growing number of colleges, workforce development initiatives, and short-term skills credential programs have begun using income share agreements (ISAs) to help students finance their training. In an ISA, the student pays a fixed proportion of his income for a set number of months after completing the program. ISAs reduce the burden on students who may experience a large economic shock or personal setback that prevents them from earning an income above the minimum income threshold set by the ISA.
Unlike guaranteed student loans, where universities get paid regardless of whether the student benefits financially from his or her education, ISAs align institutional incentives with student outcomes and have the potential to transform postsecondary opportunities to better address skills gaps for those who are un- or under-employed.
The majority of students who pursue post-secondary opportunities say they do so primarily to boost their lifetime income. However, our education and credential system still largely requires tuition payment up front, with future employment risk carried by the student. Upfront tuition makes upskilling and reskilling unaffordable for many who are unable to secure a loan and are otherwise limited by inaccessible options to advance their knowledge, skills and career. For those who can access loans, often the risk of uncertain future earnings is enough to shy away from opportunities to improve lifetime earning potential. The result is underinvestment in education and training and stagnation in upward economic mobility.
The ISA terms specify a minimum income threshold that a student must reach before having to make any payment. If a student never earns over the minimum threshold, the income share will never be obligated and the student will pay nothing. As a student’s income increases, his or her payments increase as well — but they remain a fixed percentage of income up to a maximum payment cap. This cap is a factor of the ISA amount and protects students who earn financial success after school.
A broad array of post-secondary schools and training programs are using ISAs to provide greater access to education and training. For example, the San Diego Workforce Partnership is using ISAs to create a local talent pipeline between the area’s under-employed population and the knowledge and skills that local employers seek.
Coding academies are turning out skilled coders who are being hired in droves because computer science skills are in demand across numerous industries. At least one of these, Momentum@Morehouse, provides coding credentials valued by employers and its graduates go on to earn salary increases of more than $40,000 per year.
The Student Freedom Initiative, which launched this fall, provides science, technology, engineering and mathematics (STEM) majors at Historically Black Colleges and Universities (HBCUs) with opportunities to receive income-contingent funding and is designed to reduce some of the longstanding financial burdens that Black students encounter when attempting to finance a college education.
There is substantial opportunity for expanding the use of ISAs, but we need action from policymakers to fully realize this potential. Calls for postsecondary institutions to have more “skin in the game” are bipartisan, and ISAs can help align the incentives to create increased opportunities to gain valuable knowledge and skills to a broader segment of the workforce.
Students deserve access to outcome-based financing options with affordable obligations for programs that provide knowledge and skills that lead to improved earnings. Laws governing debt and bankruptcy do not contemplate a financial tool that is income-contingent, does not have a principal balance, and sets the future obligation as a fixed percentage of income. These unique features require new legal frameworks to protect the students who utilize them to access education and training, and to provide the clarity and guardrails for ISA program providers.
Congress needs to lead the nation in creating a legal framework for ISAs that allows a robust market for education and workforce training opportunities aligned with student outcomes.
Jordan Wicker is executive director of the Invest in Student Advancement Alliance, a nonprofit trade organization that promotes the value of income share agreement (ISA)-enabled education and workforce training. Follow on Twitter @isaalliance.