The Next Model of Student Loans
Purdue University has come up with a new way to pay for college
The merits of income sharing agreements signal a more compassionate entry into capitalism for young people.
The inflation levels of student loans can be crippling to social mobility, just ask young people who graduate with $50,000 or more in student loan debt. While job uncertainty increases with rising automation, what about students staring down the barrel of six-digit loan obligations yet to come?
The student debt crisis could have long-term impacts on the U.S. economy. Yet we rarely think about alternatives to the status-quo of dangerous inflation.
What happens when student debt actually lowers the fertility rate? What happens to consumerism and an inverted population pyramid and a labor market that can no longer provide for the services society needs? Welcome to the economic press of the future.
Student debt has more than tripled since 2004, reaching $1.52 trillion in the first quarter of 2018, according to the Federal Reserve. In fact, it’s second only to mortgage debt in the U.S.
Tuition costs are also rising at an alarming rate, so many recent graduates are crippled with debt from the moment they enter the workforce. This has a spill over effect on the social mobility of “Gen Z” that could create another generational press such as those graduates who entered the job market post 2008.
Decade Repayment vs. Student Loans
Purdue University says it is the first four-year institution in the country to offer an income-sharing agreement, or ISA. It’s really a model worth looking closer into. So under Purdue’s Back a Boiler program, graduates make payments for 10 years after graduation.
- Student loans have seen almost 157 percent in cumulative growth over the last 11 years, so what if there was a better way?
Are Income Sharing Agreements (ISAs) the Future?
- The percentage graduates pay depends on their major and the amount of funding they receive. The less they make, the less they are required to pay.
- ISAs are also attracting attention in vocational schools, according to CNBC.
What I like about this scenario is its contextual and reduces risk and economic burden.
- The percentage graduates pay depends on their major and the amount of funding they receive.
- The less they make, the less they are required to pay. And if they do not work, they do not pay anything.
These are important conditions that are more compassionate and less mechanistic a system for our young people.
More than 20 million students are enrolled in American colleges and universities, according to the U.S. Department of Education, and most of them are making an incredibly risky bets with their future. This is also because we don’t know the full impact of technology, AI and automation on the future prospects of jobs.
We know skill-shortages are likely yet also job disruption and rising income and wealth inequality will impact the Middle Class. We also know many young people faced with crippling debt suffer more mental health issues, and adulting challenges sometimes taking significantly longer to get married, own property and find a relatively stable professional niche.
Student loan debt Crisis reaching Epidemic Crunch Point
Where the Lack of Social Mobility Spirals Out of Control
As student loan debt takes a larger and larger chunk of house-hold debt, more young people are owning less and living less aspirational lives regarding social mobility and living more aligned with life-work balance trade offs that feel more in subsistence mode. This has also meant a huge rise in part-time work as the new normal for a new ‘underclass’ of the lower-middle class.
In the 2020s, this problem reaches a breaking point. Without wider adoption of ISAs, student loan debt could cripple GenZ, those born between 1995 and 2012 who are and will be graduating in the pre automation economy and at the beginnings of it, a period of so much change many jobs we know today won’t exist in just 15 years.
Since 2008, young people have become an experiment of a failing capitalism which could lead to a lot of social unrest in the United States. We are seeing this in the Euro-zone where growth outside of Germany is anemic at best. Without upgrading capitalism with more ethics, we could find ourselves in serious trouble.
The Solution Scales to the Individual Situation
With ISAs, instead of taking out loans, the student agrees to pay back a portion of his or her income for a set period after they graduate. While it protects the future of the student, it’s also less exploitative with capital interest.
It’s not hard to do the math, paying back about 10 percent of an income over an extended period, could be a much better deal than the loan payments and puts less pressure on parents as well.
Increasingly coding schools and boot-camps are also taking a closer look at ISAs as arrangements that are more ethical, reduce risk and more sustainable. Students have to decide if it’s a better deal for them, for instance:
Learn to code with no payment upfront in exchange for 17 percent of their income for two years, but only if they get a job paying at least $50,000 per year. Would you do it? Do you see merits in income sharing agreements?