Purdue pioneers alternative to student loans

Following months of speculation, Purdue University has announced that it plans to give students the option of paying for tuition with a share of their future income instead of taking out conventional loans.

Earlier this month, the Purdue Research Foundation (PRF) announced that it would begin a formal process to select a partner firm to offer income share agreements (ISA’s) to interested students starting in spring 2016.

Students who choose to participate in the new offering would be able to finance their education costs with funds from a private investment pool; in exchange, they would promise to repay investors by remitting a pre-determined percentage of their future earnings over a fixed number of years. Unlike traditional student loans, borrowers cannot default on an ISA because investors bear the full risk in the event that the repayment terms fail to return a profit.

The announcement comes less than five months after Purdue University President and former Republican Indiana Gov. Mitch Daniels delivered testimony before Congress touting the advantages of ISA’s, among other possible reforms, as a market-oriented means of addressing the rising cost of higher education.

“It’s now common to hear questions asked about higher education that few used to ask,” Daniels told the U.S. House of Representatives Committee on Education & Workforce, Subcommittee on Higher Education & Workforce Training. “Is a degree really worth it? What does a diploma really mean? Are universities teaching the skills society needs? Is university research addressing the world’s greatest challenges? How can today’s levels of student debt be justified?”

ISA’s could provide answers to those questions for some students by tying the cost of a degree more closely to its professional value. Ideally, this would encourage a renewed emphasis on teaching marketable skills rather than enhancing student experience.

Purdue has already taken the first steps toward making ISA’s possible, partnering with Gallup and the Lumina Foundation to “craft the largest database ever assembled to evaluate the life success of American college graduates,” as Daniels put it in his testimony, which should make it easier for investors to assess the prospects of repayment from individual students based on the school they attend and the major they choose.

“Such arrangements would create incentives for organizations to support students with mentoring and career counseling without putting tax dollars at risk,” Daniels asserted, though he cautioned that, “widespread use of income share agreements is not realistic without legal clarity and adjustments to the regulation of student data.”

The House of Representatives followed through on his advice, introducing bipartisan legislation in July that would create legal certainty for ISA’s while also ensuring that the terms are fair to both borrowers and lenders.

Under the House proposal, borrowers would only have to make payments if they earn $18,000 or more in annual income, payments would be capped on a sliding scale (15 percent for contracts lasting 15 years or less, decreasing to 7.5 percent for contracts lasting 30 years), and lenders would be required to disclose the cost of monthly payments compared to standard loans.

Brian Edelman, CFO of the Purdue Research Foundation, told Campus Reform that the House bill “was more of a coincidence in timing,” and did not influence the decision to announce the program, which he said was solely an outgrowth of Daniels’ testimony before Congress.

He did note, though, that Purdue is already planning to meet at least one of the bill’s main requirements by doing “everything we can to help students understand their choices,” particularly with regard to the advantages and disadvantages of ISA’s as compared to traditional student loans.

Jan Miller, the president of Miller Student Loan Consulting, claimed in a recent op-ed that while ISA’s have been around since the 1950’s, they have only recently begun attracting national attention as students look for alternatives to the costly debt burden associated with conventional student loans.

Even so, he predicts that ISA’s will only prove desirable for a minority of borrowers, because students with access to federal subsidies and those with good credit ratings are likely to find traditional private loans more affordable. Those anticipating high-paying jobs later in life, for example, might end up paying less under a standard loan structure.

“For a small group of people who don’t qualify for enough help through the FAFSA, don’t have quite good enough credit for low-rate private student loans but do need funding for an education that leads to a high income career path,” though, Miller allows that ISA’s “might be a good alternative, or more likely an addition to their financial aid.”

Kevin James, a research fellow with the Center on Higher Education Reform at the American Enterprise Institute, similarly portrays ISA’s as a boon for low-income students in an op-ed for U.S. News and World Report.

Because ISA’s do not have interest rates or principal, he explains, they ensure that payments will always be affordable, which is an especially important consideration for individuals who could benefit from post-secondary education, but who worry whether their future job prospects will allow them to afford the repayment terms.

Edelman told Campus Reform that it is too early to gauge the level of interest that students and investors will show in the ISA offering, but generally concurred with James’ and Miller’s assessment of the target demographic.

“I think there’s been great interest, but I don’t think we’ll know until the pilot is implemented,” he said, adding, “I think the student that is not using subsidized government loans, and the student who finds the allocation of income uncertainty appealing—it’s that student that would benefit most from ISA’s.”

The exact form that the ISA program will take, however, has yet to be determined, which could affect the level of student interest.

“The partners that we’re seeking really comprise of two types,” Edelman explained. “One would be a provider that would be an asset manager,” which would work with the PRF to manage university endowment monies, “and the other type would provide the ISA underwriting and then the servicing of each agreement over time.”

Several companies now offer each version of ISA management in the U.S., though President Daniels has also mooted the possibility of turning to “devoted alumni” for investments, which could also influence the final form that the program takes.

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