Trade Future Income for Free College.

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If someone offered you $50,000 in exchange for 15% of each paycheck for the next 8 years — would you take it?

It’s an interesting question. Money up front now, when you need it, in exchange for repayment later when you have it. It’s like a loan, without the interest- which is great. It sounds like a win-win... so what’s the catch?

This is the challenging question students are now facing at some colleges with what are being called “income-share agreements”.

An income share agreement within the context of higher education is where a college pays the tuition bill for a student and in exchange, the student agrees to give a portion of their future income back to the college.

Essentially, students are selling future stock in themselves.

The Upside to Income Share Agreements

The upside of the income share agreement is that there is no interest on the loaned money and if you don’t get a job right out of school you don’t have to pay anything. The percentage you pay is based on the amount you’re making.

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The Questionable Side of Income Share Agreements

I ran some numbers, and while income-share agreements don’t technically detail any interest, the math is telling a different story.

Using our original example: let’s say the college gave you $50,000.

If you make $60,000 annually when you graduate, you owe the college (15%) $9,000 per year. So, instead of taking home $60k, you take home $52k.

Over the course of 8 years, you give them $72,000.

They only gave you $50,000 to start with. So, you paid $22,000 extra. They can call the extra whatever they want, but it looks like interest to me…

Case Study: Lauren- Purdue University

NPR’s Planet Money podcast ran an episode last week that featured Lauren Neuwirth, a student at Purdue University.

Lauren first describes her difficulty in trying to find funding for college and how she was seriously considering joining the military as an option for payment. When she was at her wit's end, it was suggested to her that she check out Purdue University this new “income-share agreement” program.

No one knew much about the program, but it was supposed to help in situations where loans were not an option and scholarships/ grants weren’t cutting it. Lauren looked into it and decided that it actually seemed great.

In the end, Purdue University gave Lauren $50,000 and she signed a contract agreeing to pay approximately 15% of her future income for the 8 years after she graduates to the University.

The catch is, the more money she makes, the more she has to pay. So, for example, if Lauren graduates and becomes a tech superstar earning $100k+ per year, she will have to pay a lot more than 15% of her income to Purdue.

There is a cap built in for extreme scenarios, however. A student will only be required to pay back 2.5x the amount borrowed. So, in Lauren’s case, she would only have to pay back $50,000 x 2.5 = $125,000.

She is then free from her obligation and can keep any future earnings.

The Downside to Income Share Agreements

As mentioned above, one of the major downsides of income-share agreements is that the more money a person makes the higher the percentage of their income they have to give up. This doesn't give a person a real incentive to work hard and earn top dollar for the first 8 years out of school.

Additionally, income-share agreements have been criticized because the system encourages people who know they will earn a low income (unfortunately English majors, arts majors, etc. fall into this category) to sign up and discourages people who will earn high income (engineers, finance majors, etc.) from signing up because they know they’ll end up paying more.

This is a problem because, in order to fund the program, the cycle needs to be continued via the graduates paying back the money they borrowed.

Opportunities for Higher-Ed System Improvement

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The cost of college debt is too crippling and people are just deciding not to go.

It’s bad enough we are making students choose between selling stock in themselves and getting a quality education- but at least there’s a choice.

Either we find a new option, like income-share agreements, or we accept that college is not a priority and start finding other ways to judge a person’s job qualifications.

This system isn’t perfect, obviously, but it’s better than nothing. If the current business and educational leaders of this country don’t figure something out soon, the new generation will make a choice for them.