Income Share Agreements — Yay or Nay?

— The Economist takes a look at Income-Share Agreements (ISAs). ISAs are used in 29% of student loans in the US (sometimes mixed) and effectively offer students the chance to swap debt for equity in their future earnings (typically between 2–17%). Students that go for ISA end up paying slightly more than their loan with the advantage being they aren’t mired in debt if they fail to land a job.

Under strict circumstances ISAs do offer additional choice to the consumer (especially those who lack upfront capital) and in the absence of the federal government stepping in to help students — which it won’t — such flexibility isn’t necessarily a bad thing provided it is heavily regulated. ISAs in particular work best for ‘last mile programs’ such as Coding Bootcamps. This is because an ISA skews incentives towards a well paid job (in fact circumscribing choice further down the line). If the individual knows they want to be a coder because it’s fun and pays well — then an ISA may be a good option. Where I’m far more sceptical is for undergraduate degrees, here the student is giving up equity in future earnings and circumscribing future choice during at a time when they should be totally free to explore different careers. There is also a moral argument of students (largely poor) giving up equity (a form of ownership) to richer institutions (universities/banks).

Much like the contorted health insurances one also sees in the US, ISAs are a product of a deeply marketised education system — they are a financial innovation to provide consumer choice which couldn’t exist in Europe where Higher Education is free or like the UK government offers a highly regulated loan. To that end, more choice is probably a good idea but it’s dim scenario that requires ISAs at all — here