College Students across the United States are facing the increasingly common student loan versus overall degree value balancing act. With collegedebt.com reporting that current student loan debt in the United States amounts to 1.5 trillion, students are seeking alternative methods to tip the scales back in favor of degree value.
For students at Purdue University there may be an alternative to the traditional student loan. Recently, Purdue along with a few select universities, have adopted an income-share agreement. An income-share agreement or ISA promises investors the future wages of a student in return for tuition payments now. Purdue University has teamed with the Purdue Research Foundation, the governing body of the university’s endowment, and select investors to provide this opportunity to students.
Unlike a traditional loan which student’s payoff following graduation, along with accumulated interest, an ISA strays away from traditional debt methods. An income-share agreement promises the investor a student’s future wages, for generally no more than 10 years. Depending on the agreed percentage of income investors stand to make relatively large returns. The Wall Street Journal reported that “students who borrow $37,000 through an ISA and earn $50,000 a year would likely wind up paying back between $55,528 and $88,845 under a typical ISA…” Returns like these will likely boost the market for ISA agreements in the coming years.
However, critics are skeptical about the benefits surrounding these agreements. If you were to calculate the math on the above returns investors stand to make 8.7% to 21% profit. The concern is that ISA’s do not actually offer a better option to college students, but expose them to investors greed. Additionally, the relative uncertainty surrounding a graduate’s future wages will concern interested investors.
Nonetheless Purdue University under the command of former Republican Senator Mitch Daniels plans to “become a national test bed for ISAs”. Purdue has been working closely with Congress on the regulation surrounding this investment instrument. As of now congress has yet to establish concrete laws subjecting investors to additional uncertainty.
The current rules behind ISA’s protects investors relatively well, the obligation is deferred until six months following graduation, giving graduates time to search for employment. The ISA is a fixed agreement so investors stand to make returns only during the 10-year term, regardless if the student does not find employment. Students are required to show they are actively searching for employment, which provides protection to investors. However, the agreement also protects students, for students who make less than $20,000 per year, they pay nothing to the investor.
Additional regulation is on the horizon, Rep. Luke Messer has introduced a bipartisan bill which aims to fulfill the above protections for both college students and investors. Regulation remains the singular unknown holding the mass marketing of ISAs. Universities are awaiting results from the Purdue test trial before entertain the idea themselves.
For those students who are particularly skittish around debt ISAs may be the best option. However, many involved with the process recommend financial guidance before agreeing to these unregulated instruments. The current standing of ISAs is relatively reliant on Purdue’s test trial and legislation like Rep. Luke Messer’s introductory bill.