At an event in April 2019, Diane Jones, the Education Department’s principal deputy undersecretary, said the department was considering an experiment to help colleges offer income-share agreements (ISAs), a form of financing where students who borrow money promise to pay back a percentage of their future income as repayment.
While those plans never materialized, colleges are nevertheless pushing forward.
In October, Robert Morris University launched its “Colonial Fund,” which lets students borrow $5,000 through an income-share agreement. Last month, nine historically Black colleges and universities announced plans to offer a similar income-based financing option through a nonprofit funded by Robert Smith, the private-equity billionaire who also paid off the student debt of the 2019 graduating class of Morehouse College.
To date, about 60 U.S. colleges offer ISAs, estimates Tonio DeSorrento, CEO of Vemo Education, which designs and services such agreements for universities and vocational educational programs.
More common among private vocational programs, income-share agreements are increasingly offered by colleges and universities. Yet with little data on outcomes from ISAs and with labor markets upended by a pandemic, the exercise remains very much an experiment in higher education.
Still, DeSorrento estimates that over 1,000 ISAs have been awarded by colleges through Vemo, which is considered the largest ISA service provider for them.
The college with the biggest experiment in ISAs is Purdue University, which in 2016 became the first major public college to offer ISAs. To date, its program has disbursed $17.9 million across more than 1,600 contracts, and university officials are fundraising for Purdue’s third ISA fund. About 400 of its ISA contracts are in repayment status, meaning the students have graduated and landed a job earning above $20,000, which is the income threshold beyond which students must pay back.
Despite being one of the first programs to offer ISAs, Purdue officials are hesitant to tie them to graduation rates, which has generally improved over the years. “I don’t think we have enough data to make that connection with income-share agreements,” says Mary-Claire Cartwright, chief information office of the Purdue Research Foundation who manages the ISA program.
Other programs have been slower to attract students. Invest in U, launched by the University of Utah in January 2019, has awarded just 59 ISA contracts totalling $360,000, according to a university spokesperson. Three recipients have graduated and are making repayments.
Some programs are deliberately small. Colorado Mountain College, whose ISA fund is specifically offered to DACA students who aren’t eligible for federal aid, supports 20 students a year, according to its chief operating officer Matt Gianneschi. Since 2018 it has awarded ISAs to roughly 30 students, three of whom graduated this past June.
Do Students Share the Excitement Over ISAs?
Researchers say it is too early to draw conclusions about whether ISAs have delivered on their promise in higher education: offering an affordable financing alternative that aligns the interests of schools and students around making sure they graduate and get good jobs. But what colleges are learning is whether students understand ISAs and how they decide to take one on.
A study funded by the Lumina Foundation that is expected to be published next fall looks at how students are participating in ISA programs at the University of Utah, Colorado Mountain College and the San Diego Workforce Partnership, which provides job-training programs for adults.
So far, “initial ISA enrollment has been slower than expected” across the three programs, shares Terri Taylor, strategy director for innovation and discovery at Lumina Foundation. “In some ways that’s actually good, because I think what everyone is realizing is that although the general concept of an ISA might be somewhat easy, actually getting the terms right is pretty hard.”
And as it turns out, getting students to understand those terms, and how they differ from loans and other financing tools, is a common hurdle.
Initial disbelief and skepticism
Ever see an offer that sounds too good to be true? That’s how many students feel when they first hear about ISAs, says Jason Taylor, an assistant professor in the department of educational leadership and policy at the University of Utah who has been researching students’ perception of ISAs for the forthcoming Lumina study. (He is of no relation to Terri Taylor.)
“This is a new financial tool for students, and students have mixed perceptions and don’t understand it well,” says Jason Taylor. “Students are inundated with emails and promotions offering to help them pay for college, so already they approach it with an initial skepticism.”
That skepticism is not uncommon, echoes Samantha Zucker, a design researcher who has done user studies for ISA programs. “Students generally start in disbelief” when hearing about them for the first time, she says. Especially wary are those who are financially vulnerable. “Low-income students are getting served a ton of scams everywhere. They’re getting phone calls, often selling some student-loan scams on the phone,” she adds. “They’re used to these things being too good to be true, so when you tell them about an ISA, generally that is their first reaction.”
“But honestly, I’m generally happy to see that they don’t trust it right off the bat,” says Zucker.
Claire Gregowicz, who along with her 20-year-old son took out an ISA to attend an UCSD Extension program offered through the San Diego Workforce Partnership, recalls that her son “initially thought it was a phishing scam” when they first read about the ISA. Before signing up, they met with a program manager who talked through the terms to assuage their concerns.
Part of the problem lies in the marketing language, which can border on hype. Websites, podcasts and op-eds tout ISAs as a powerful alternative—even the solution—to student debt. Such claims have caught the attention of consumer-protection advocacy groups like the Student Borrower Protection Center, which has found marketing language that it contends is deceptive and predatory.
Is it a loan? Debt? Something else? To students, it’s kind of the same.
Are ISAs a loan? Debt? A contractual agreement? An obligation?
Strong opinions have emerged among opposing sides of this question, which remains unsolved from a legal standpoint. The answer is important, as it has implications about whether ISAs are subject to consumer protection laws and information disclosures that traditional loans must abide by. Several bills have been proposed by Congressional lawmakers in recent years in an effort to establish legal guardrails for ISAs. But such measures haven’t gained traction, meaning that ISAs continue to exist in a legal gray area.
To students, though, the legal technicalities may not matter as much.
“From our interviews, students definitely conceptualize this as a type of debt or loan. They understand that they took out the money, and have to make payments back” that could amount to more than what they took out, says Jason Taylor.
Ironically, offering an alternative to a loan was one impetus for starting an ISA fund at University of Utah, which is in a state known to have a debt-averse culture. Utah undergraduates borrow less money than their peers in other states—even if it means that they may not finish college.
“Our particular student population were just unwilling to take on debt,” says Courtney McBeth, who helped launch the Invest in U fund and is now a senior vice president at Strada Education Network. “Our juniors and seniors, in particular, would prolong their studies, and it became the case where our eight-year graduation rates were higher than our six year rates. So we just had this long tail of students taking a long time to graduate.”
Of the 59 University of Utah students who have taken out an ISA, just 13 have other sources of financial assistance, according to a university spokeswoman. Though that figure is based on a small sample, that percentage is much lower than at Purdue University’s ISA program, where 91 percent of students also have other financial aid.
To understand how ISAs work, students need to get how loans work.
ISAs are often marketed as a better alternative to loans. But in order to understand the differences, students first need to understand how loans work.
“We realized early on that in explaining an ISA, you also have to explain how loans work and what’s happening with their loans,” says Zucker. “Students are really fixated on interest rates, and how much they will pay back over time … They’ve all heard horror stories from their teachers and others who all have debt that they’re going to be paying off [for what feels like] forever.”
That was the case for Kaliah Little, who says her father is still paying off Sallie Mae loans in his fifties. It was one of the reasons Little decided to take out about $22,000 in an ISA through Better Future Forward, a nonprofit that partners with college-readiness organizations to offer ISAs to students. That money helped her attend and graduate from North Park University, in Chicago, this month.
Little, who previously interned in finance work, said she was able to grasp the differences between ISAs and loans fairly quickly, but understands that’s not the case for others. “What does it mean to pay interest on loans, and the principal, and how does that amount differ from a portion of your income—that’s what can be hard to figure out,” Little says.
When ISAs and loans are compared side-by-side, “students tend to get stuck in the difference between the interest rate and income percentages,” Zucker adds. “Those two things often end up getting conflated.”
Having an advisor compare and explain repayment scenarios proved helpful, says Latifat Soyan, a junior majoring in business marketing at University of Illinois-Chicago who also took out an ISA from Better Future Forward. Before signing the agreement, she had an advisor show her a spreadsheet with a side-by-side comparison “breaking down ‘this is how much you’re taking out, this is how much you would pay back under different scenarios,’” she recalls.
Uncertain about her job prospects after she graduates, Soyan feels some relief in the fact that she won’t have to make repayments unless she earns at least $30,000. “When I looked at it in that way, it seems this option is more considerate of my circumstances versus private loans, which aren’t going to pause my payments or stop interest from accruing if I don’t have a job.”
Because income changes over the course of a career, it is difficult to make precise forecasts of one’s monthly payments under an ISA. Comparison calculators, including those created by Vemo, have been the target of complaints that say their salary data is outdated. (The company says it has since updated the information.)
On the upside, most ISA contracts specify the cap on how much a borrower will pay, or how many repayments must be made, in order to fulfill the obligation.
The clearest, albeit oversimplified, way to explain the difference to students, as Zucker found from her research and shared in a report, is:
The pandemic has made ISAs less financially competitive
Officials at Purdue and other colleges say ISAs are no replacement for federally-subsidized loans. But they add that ISAs are usually designed to beat Parent PLUS loans or private loans, in terms of how much a student is likely to pay back overall.
Except that may no longer be the case. Among the impact of the pandemic was a general lowering of interest rates across the board, and those for Parent PLUS loans have dropped from 7.1 percent to 5.3 percent.
According to Purdue University’s ISA comparison tool, which projects total repayment costs based on one’s major and anticipated graduation date, total ISA repayments are higher than ParentPLUS in many scenarios. Similarly, University of Utah’s ISA website currently shows that the estimated total ISA repayment for one scenario is higher than Parent PLUS, and even more than a private loan. (Until last week, it also had a calculator that offered comparisons based on major and graduation date, but that has since been removed.)
While there are important differences in repayment terms between ISAs and Parent PLUS loans, the fact is that when it comes to total cost, ISAs may not have the competitive edge. In addition, the federal department of education has extended loan forbearance and temporarily set interest rates to zero for federal loans in response to COVID-19.
In normal times, one of the selling points for ISAs is the income threshold below which students do not have to make repayments. At Purdue, that bar is set at $20,000—which is low. But for Andrew Hoyler, who entered Purdue in 2014 in pursuit of a pilot career, “I knew right off the bat that after graduation, the starting pay for pilots would not be great,” he says. Regional pilots start off making as little as $20,000 a year. “I knew of pilots who had been living on food stamps.”
Knowing that his starting salary prospects would likely be low, Hoyler, an out-of-state student, took out $21,000 through ISAs. He graduated in 2017, and was working for PSA Airlines when the pandemic hit, forcing him to return to Purdue to teach. He has been paying 7.83 percent of his monthly income, and his monthly payments have ranged from $174 to $334.
Hoyler says he would not recommend ISAs for students who plan to enter high-paying professions and can pay off their loans faster. But they could be a good option “for people who may not know what they want to do, or maybe plan on going into a lower-paying field for a couple of years. Or for those who just need some time to figure out what you want to do.”