Income Share Agreements: Improved Thinking on How to Pay for College
At the most expensive U.S. colleges and universities, the advertised price now exceeds $70,000 per annum although most institutions are significantly below this level. Financial aid lowers the actual cost of attendance for many students.
Still, American families are less willing to shoulder the expected family contributions that make a college degree possible. The financial education that produces an informed consumer is also spotty, despite the scattering of interactive, explanatory tools available on most college websites.
Norwich University in Vermont, one of America’s private post-secondary service academies, offers an example of innovative thinking to counter these negative trends. It is building a model of an income share agreement (ISA) to reorder how colleges fund the cost of a degree.
In Lieu of Loans, Student Payments Linked to Income After Graduation
The economist Milton Friedman conceived the idea of income share agreements in the 1950s. The concept was discussed but failed to advance much over the long-term at Yale University in the 1970s. The ISA ties repayment of what capital the student receives as financial aid to their future financial success.
Simply put, under an income service agreement, a student is required to repay a set percentage of his/her salary once s/he begins earning a salary that exceeds a pre-determined threshold.
There are two types of ISAs:
- Unfunded, in which an institution converts its current grant money to ISAs and realizes no immediate cashflow change and instead, begins to realize “new” cashflow when students begin to repay.
- Funded, in which a third-party partner funds the ISA instrument, and thus the institution realizes “new” cashflow immediately.
Colleges and universities have been reluctant to put in place the unfunded ISA solution because it’s more challenging to justify a new, different financial product, particularly when there is no immediate budget impact.
Partnering with Employers to Make College Possible, Meet Workforce Needs
Norwich believes, however, that it has created a paradigm-shifting academic program approach founded upon an ISA.
In its simplest form, The Partridge Model, named after the University’s founder, Alden Partridge, builds a flow of students from high school organizations into Norwich and from adult organizations into its continuing education division. For employers looking for a well-trained workforce, the model is a less costly and more effective way to fund and develop a workforce, where the skill requirements constantly shift within the marketplace. For Norwich, the model builds off the institution’s goals of flexibility, affordability, and relevance.
The Partridge Model presumes that employers are willing to innovate and invest with Norwich to solve the problem of how to educate students by creating a seamless pathway that leads to employment with them, alleviating a shortage of employees in critical industries.
How does Norwich’s novel ISA model work?
- Employers commit to participation in the Partridge Model from the outset. Norwich creates an education and training program, with an emphasis on experiential learning that delivers graduates who become employees with the right human capital characteristics, suitable to their industry.
- It relies on banks of credits available for internships, high school experiences, and some small portion of outcomes-based learning.
- The employer also contributes financially by sponsoring a portion of the program’s upfront costs and partially financing a portion of the students’ tuition costs through income share agreements.
Norwich will also spearhead a consortium of like-minded schools, the Partridge Consortium, that enhances and deepens the quality and quantity of graduates entering the workforce.
There are benefits on all sides:
- Norwich grants access to students who repay their income share agreements when they begin to work after graduation, typically at 4%-8% of salary for a period of 5–10 years.
- These students also work for the employer, earning good money while in college and making Norwich even more affordable for them.
- Most students will intern with their prospective employers twice during their time as undergraduates.
Students graduate with a degree, experience, a defined skill set, and a job, effectively “test-driving” their employer. Their post-graduate employment will be with a dynamic company in an identified area of great national need.
For the employer, their investment in The Partridge Model is significantly less expensive than traditional recruiting, producing a predictable flow of hires and an increased pool from which to hire.
There is no need for remedial training because a Norwich University education provides the liberal arts skill set — the ability to articulate, write, apply quantitative methods, use technology, and work in a collaborative setting — that precludes the need for industry in-house remedial training to acclimate new employees to workforce demands.
Faculty Also Benefit from The Partridge Model
For faculty and staff, a Norwich education, with a mix of courses on the main campus, satellite and online locations, and additional campuses, offers significant new teaching opportunities.
Where and when do faculty wish to teach? Effectively, The Partridge Model de-couples the historic relationships between people, programs, and facilities on a traditional residential campus to create a new, flexible, and dynamic teaching and learning approach.
Of course, to be successful, the university must have deep recruiting channels, a means of financing students to ensure no upfront gap in cost, an engaged and creative faculty, and a shared governance structure of trustees, faculty, and administrators with a single focus capable of agile oversight and management.
The Partridge Model at Norwich University is a great example of innovation that addresses fundamental questions of access and cost. It simplifies an otherwise chaotic supply chain, creates a level playing field for students, improves the financial aid discount rate spiral now occurring at most colleges, and better prepares students for the workplace while reinforcing the tenets of a liberal arts education.
It is an example of a much-needed next-generation solution to how students and families finance their college education.