By Annabelle Williams The Philadelphia Inquirer
WWR Article Summary (tl;dr) With an "ISA" or "income share agreement", students work with the financial aid office to decide what percentage of their future income they'll pay, based on the projected salary for their major.
The Philadelphia Inquirer
Consider these alarming factoids:
The average student debt for a college graduate in 2017 is $37,172, according to Debt.org, a national debt relief group.
Student loan debt in America has doubled just since 2009, and surpassed $1.5 trillion earlier this year, according to the Federal Reserve.
The situation cries out for better solutions. And some colleges, such as Purdue University in Indiana, and Lackawanna College and Messiah College in Pennsylvania, are exploring new options, including income share agreements (ISAs).
Instead of paying tuition upfront, students hand over a percentage of their future income. This puts pressure on colleges to develop students for the job market, and it has the potential to ease the credit crunch bearing down on students today.
At the same time, it hasn't been widely used yet. No universal regulations exist.
Tonio DeSorrento, CEO of Vemo, an Oakton, Va. company that administers ISAs for universities, explains that the current business model for college loans is a "misalignment," placing all the burden on students and their families, and that colleges need to have some skin in the game.
DeSorrento said Vemo has "about 30" schools that are clients, but some have not yet publicly announced their use of ISAs. Vemo, like the colleges it represents, does not collect fees from colleges until after the students start repaying their ISAs. In the meantime, DeSorrento characterizes the 35-person company's business model as "venture-backed." In September 2017, the company raised $7.4 million in seed funding.
WHAT IS AN ISA? Rather than looking back at credit, ISAs require you to look forward at projected salary by college and major and compute a rate that the student should be able to pay back. While the specifications vary by school, they generally use career data about graduate outcomes to map out future salaries. And if students graduate without a job or with a low-wage job, many schools won't charge them anything at all.
Students work with the financial aid office to decide on a rate, what percentage of their income they'll pay, based on the projected salary for their major and other considerations, such as other loans to repay. ISAs do not charge interest. And the school also caps the total payback. For Messiah College near Harrisburg, a student no longer owes repayment once he or she pays back two times the loan amount.
If students don't exceed a salary threshold, which, for Messiah, is $25,000, they do not have to pay anything back until their salary surpasses this minimum. Forgiveness sets in at 13 years.
Suppose you make $40,000 a year after graduation. In the Messiah case, students would pay a portion of their salary to Vemo and use tax returns to verify income until the 13-year-window has passed or they have paid back 1.6 times the loaned amount, whichever comes first.
In another scenario, Messiah students who want to pay off the ISA in full rather than take an effective pay cut can opt to repay Vemo 1.6 times the loaned amount as a lump sum, extricating themselves from the deal.
ISAs are designed to pool risk. Even if some students don't repay because they never cross the earnings threshold, other students with higher incomes will pay more than was initially borrowed. These disparities allow schools, in theory, to recoup potential losses, but the model is hard to test: ISAs have only recently gained traction, and long-term data aren't yet available. WHAT SCHOOLS NEAR PHILADELPHIA OFFER ISAS? Lackawanna College in Scranton announced in Nov. 2017 that it would offer ISAs for students to offset some costs. Tuition and fees are "just under $15,000" a year on average, says Mark Volk, president of Lackawanna College. Its ISA program is a partnership between Lackawanna and Vemo.
Just three students have opted for an ISA so far because it's a small school and a relatively new program, but administrators anticipate growth. Right now, Volk says the school is "applying about 7 to 8 percent of (its) operating budget for discounting," but will soon be pulling from its $5 million endowment, which has exhibited significant growth recently.
As with loans, ISAs at Lackawanna can be deferred for six months. And, Volk explains, "If you're not making $20,000 a year, there's no payback." Once graduates make more, repayment is a 2.75 percent cut of their salary to a maximum of two times the amount of the loan, until the loan has been paid back in full.
Messiah College, a small Christian school in Mechanicsburg, PA, now offers its 3,331 undergraduate and graduate students the option to participate in an ISA to offset the $34,320 annual tuition. Rates for students who have demonstrated financial need run between 3 and 3.5 percent of future salary. Like other colleges, Messiah waives the liability if graduates never cross a certain income, in this case, $25,000 annually. However, students cannot borrow up to the cost of their education: there is a limit of $5,000 per year.
Like Lackawanna, Messiah pays for ISAs internally.
Messiah has about 40 students using ISAs across a range of majors, and Walker explains that it is offered "uniformly to any major ... from Christian ministry to accounting."
Brian Gilroy, 21, of Shinglehouse, Pa., is entering his fourth year at Messiah. Rather than taking out private loans, he took out a $5,000 ISA for his last year. Says Gilroy, when he heard that "there wouldn't be any interest payments," he was sold. The process was quicker than loans and didn't require a credit report, becoming less of a "headache."
He plans to pay off the balance of the ISA soon after graduation.
OTHER CONSIDERATIONS IN AN UNDER-REGULATED SPACE The most prominent user of ISAs is Purdue University, which, like Lackawanna and Messiah, partners with Vemo. Purdue, however, funds upfront ISA costs through their "Back a Boiler" program, managed by the Purdue Research Foundation.
According to its website, Purdue has 478 contracts with students using an ISA, totaling $5.9 million. Over 100 majors are represented. The top six colleges participating are: Engineering, Polytechnic Institute, Health and Human Sciences, Liberal Arts, Krannert School of Management, and Agriculture.
The Association of Independent Colleges and Universities in Pennsylvania (AICUP) represents private, nonprofit colleges in Pennsylvania, and both Lackawanna and Messiah are members. AICUP recognized ISAs as a "preferred program" in June 2018 and will fully endorse it in the future "if things go well, which I suspect they will," says Tim Alexander, AICUP's vice president of finance and administration.
"We sort of put income share agreements in between federal loans and alternative loans in terms of expense to the student," Alexander says.
U.S. Sen. Todd Young, R-Indiana, introduced the 2017 "Investing in Student Success" bill to provide a regulatory framework for ISAs, but the measure wasn't approved.
AN EXPERT'S OPINION ISAs are "designed for students in their final years of college or who have maxed out their (federal) loans," concludes Audrey Peek, an analyst at American Institute of Research who studies financing for post secondary education. These agreements supplement an existing financial aid and loan package.
Due to the lack of standards, Peek says, financial aid officers worry about protecting students and being transparent.
As for the "three key claims about ISAs", that they will help loan-averse students, signal value about degrees, and expand student's funding options, _ Peek says that the institute has "not found evidence to enthusiastically support any of these claims."
But ISAs are new, and "we don't know yet what students will do when there is actually money on the table."