What Forbes Got Wrong About Income Share Agreements
In “Colleges Should Not Allow Students to Pay With a Percentage of Future Earnings,” Forbes’ contributor Derek Newton got both the intent and purpose of an income share agreement (ISA) wrong.
In conversations with higher education leaders across America, my experience indicates that there has been a dramatic shift over the past year from identifying efficiencies and economies of scale as top priorities to a call for new partnerships and products — such as ISAs — that colleges and universities can use to break out of their operational, incrementalistic inertia.
Mr. Newton argues that ISAs “place a self-interested, speculative hand on the scale of important education and career decision making.” In fact, there is nothing more self-interested than student debt because it cannot be discharged in bankruptcy unless the borrower can show that debt causes “undue hardship,” which is practically impossible if the borrower is not disabled. Alternatively, ISAs can be structured not to be punitive; indeed, they can be administered using a normal interest rate with the standard servicing fees.
Mr. Newton’s further critique of ISAs is “they are profit-seeking, using future employment and education choices of young people to gamble.” This is incredibly naive since lobbyists representing the more than $1.5 trillion student-loan industry — itself designed to make a profit — have already created a class of loans that can never be forgiven.
Finally, Mr. Newton objects to ISAs because they are shaped by majors and potential career choices. How are student loans any different? If a student chooses a low-paying field in existing loan programs, it is extremely unwise to rack up large amounts of unforgivable debt. Is this a better approach?
Colleges today are operating largely in deficit, providing education options for students using insufficient tuition revenue after heavy discounts to pay their bills. This operating model is unsustainable for students and the institutions.
ISAs improve the bottom line for institutions in the short run because they provide a ready stream of cash that increases the financial sustainability of tuition-dependent institutions.
Because they are treated as a contingent obligation and therefore as a receivable, the broader institutional use of an ISA reduces the tuition discount rate.
Since many colleges face structural deficits, CFOs can use income share agreements to balance their operating budgets. By doing so, colleges remain relevant using a new financial aid tool that is not dependent on government funding yet requires them to maintain “skin in the game.”
The benefits to enrolled students are obvious:
- First, ISAs increase access to a college education. They encourage students to find the best value possible when measured by an institution’s reputation and cost. They improve students’ financial acumen by increasing their education of the financial aid options available to them.
- ISAs further provide an affordable alternative since a college must construct a consumer payback plan that offers students a viable, reasonably-priced option. If a student does not meet the income threshold for their field, no repayment is necessary. When they do, the percentage of the annual payback is fair and reasonable.
- Finally, students participate with institutions in a partnership in which both buy into the principles, practice, protocol, and repayment terms of an ISA.
The government also benefits from income share agreements. Early iterations of ISA programs do not presume government involvement although they hold out the possibility of a variety of strategic investors from across numerous sources.
ISAs are a solution proposed as much by higher education providers as by for-profit groups. They provide an infusion of revenue that is likely to reduce school closures. Early modeling also suggests that they will reduce student defaults.
Perhaps most importantly, ISAs hold institutions accountable to students and their families, accrediting groups, and government accountability measures.
Of course, ISAs are not a panacea that will solve the student financial aid crisis nor are they intended to be so. Instead, they are a critical new tool that can be used in a variety of ways to support access. They may help to cover the gap between a college’s offer and a student’s capacity to pay through traditional means. They can be used to offset tuition increases for juniors and seniors. They can fund new program initiatives at the graduate level and adult, professional, and online programs where students already may have secured employment.
When used properly, ISAs become a new, attractive option in circumstances where there is a dearth of new ideas about how best to finance access to higher education.
Mr. Newton is wrong in his claim that ISAs are the equivalent of indentured servitude and that colleges should finance ISAs directly. Colleges used to run their own loan programs, but many found that they lacked the capital, servicing capabilities, and scale to make these programs sustainable. ISAs can solve this problem by design and careful administration. It’s time to add them to the list of available financial aid options.
There are broader benefits to society. ISAs will increase the college-going rate, link education to workforce needs, and produce educated citizens, thereby supporting the intellectual underpinning of a liberal arts education.
Income share agreements are a good start on making student financial aid more nimble and adaptable for students. Higher education must get past the stumbling block that “we can’t develop new products because we’ve never done it this way before.”