Income Share Agreements: Connecting Education to Employment Through Financing

For those who may have missed it, in mid-April thousands of ed tech entrepreneurs, investors, educators, philanthropists and other edu-wonks converged on San Diego for the annual ASU-GSV summit. The conference, which first took place seven years ago in 2010, serves as a yearly gathering point for those interested in the latest developments in education technology and related services.

As part of the summit, I had the pleasure of moderating a panel on income share agreements (ISAs) that USA Funds^®, a sponsor of ASU-GSV, helped to organize.

ISAs are an idea that has been around for decades but has started to get more attention recently as researchers and entrepreneurs seek better alternatives to traditional student debt. Under an ISA, a student receives funds to help pay for school in exchange for agreeing to pay a percentage of his or her income for a set period after school.

In recent years, a small group of for-profit and nonprofit firms have emerged attempting to offer ISAs to students, though the market is still at a nascent phase of its development. To talk about these developments, I was joined on the panel by the CEOs of two new firms operating in this space, Tonio DeSorrento of Vemo Education and Andrew Davis of Education Equity. Beth Akers, an economist and researcher at the Brookings Institution who has written on this topic, rounded out the group.

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“There’s no crisis in Mercedes finance,” he said, because people get a Mercedes with their loan — something that’s often not the case with education.

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We had many great exchanges during the conversation, so I’d encourage you to watch the full event on the ASU GSV website. For those who may not have time to do so, however, here are some of the highlights:

• What does this look like in the real world? Purdue’s “Back a Boiler” program, announced in early April (and to which I am an adviser), is a recent implementation of ISAs that is getting a lot of attention.
• What’s the purpose of ISAs? Andy made the point that ISAs are really a way for students to pay for school in a way that is far less risky than traditional loans. To add on to this point, Beth noted that the college premium is still high even as college has become more expensive; however, it’s far more risky to borrow so much money to attend. ISAs are a promising tool to help minimize that risk, she said.
• Isn’t this indentured servitude? “Absolutely not,” said Andy. If anything, he noted, traditional student loans are far closer to indentured servitude as students must choose careers where they can earn enough to cover their loans. “We don’t tell them where to work or if they have to work,” he said, “because that’s our risk in managing our pool and making investments.”
• Are ISAs even needed with federal income-based repayment? The main place ISAs will likely find a market is as an alternative to private student loans, Beth said, noting that private loans have high rates of interest and few protections. Andy commented that the government is good at delivering large sums of money but not ensuring that students (and taxpayers) are getting any reasonable return on their education. Tonio summed up by saying that oftentimes people’s frustration with student loans has more to do with what they got from their school relative to what they paid. “There’s no crisis in Mercedes finance,” he said, because people get a Mercedes with their loan — something that’s often not the case with education.

• Why is legislation needed? Tonio noted that ISAs face legal and regulatory uncertainty on a range of fronts, making it more difficult to finance them. Therefore, clarifying certain things like tax treatment, proper disclosures, and other questions can give providers and investors greater certainty that they are following the proper rules. Andy added that any market that is sustainable is one that has clear guidelines.
• Will theater majors be treated differently from engineers? Tonio said that ISA providers may ask for different percentages of income—or offer different amounts of money — for students in programs that vary in terms of future earning potential. This is not overcharging students in one major relative to another, he said, but instead equalizing how much they’re likely to pay for each dollar taken out through the ISA. Beth noted that many people don’t like this because they like the cross-subsidies built into the current system, but it could be a very useful signal as to which programs offer greater returns.
• Will investors be interested in this idea? Tonio says he sees “intense” investor interest. The task of his company and others hoping to raise capital is to help them price it correctly, and to develop common practices across things like underwriting and servicing. Andy added that he believes his company can offer a rate of return that is commercially feasible; in the near term, however, he’s also been able to raise capital from groups that have a secondary interest in the types of students he’s financing (teachers).

I hope these highlights have been helpful. I certainly appreciated the opportunity to engage in a fun and interesting conversation with both the panelists and the attendees, so I hope others found it to be engaging as well. If you have questions or would like to discuss any of these topics further, please comment on this blog post, and your comment will be directed to me or the appropriate panelist.