How Do Income Share Agreements Work?
October 20, 2014
Recently, a number of policymakers have suggested the use of Income Share Agreements (ISAs) to finance higher education, as college tuition costs have skyrocketed and students have taken out loans at record rates. Basically, explains Brookings Institute Fellow Beth Akers, ISAs give investors a stake in a student's future earnings in exchange for college loans.
ISAs are different from loans, however, as loans establish a total amount that must be repaid to the lender. An ISA, on the other hand, only requires a percentage of the money at issue to be paid back to the lender; the amount goes up if the student's salary goes up, and it falls if the student's salary drops. A distinguishing feature of ISAs is that they transfer risk away from the borrower.
Akers points to another feature that could make ISAs a promising new funding tool: they could point students towards high-quality educational options. Those funding ISAs will be hesitant to pour money into an education that is unlikely to pay off, and the terms of ISAs would likely reflect this reality. For example:
- If a particular college degree was likely to produce strong returns (perhaps tuition costs are very low compared to the value, or perhaps a student's future wage is likely to be high), an ISA might require only a small percentage of a student's income as repayment.
- On the other hand, a college program that is not worth the price tag might require a large percentage of the student's future earnings.
Akers contends that an ISA market could eventually encourage schools to align their tuition costs with their value.
Source: Beth Akers, "How Income Share Agreements Could Play a Role in Higher Ed Financing," Brookings Institute, October 16, 2014.
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