Income Share Agreements: An Idea Whose Time Has Come
You can’t go a week without someone writing a think piece on whether college is worth it. CNBC just published the results of a June survey which included the question. At the extremes, Americans are evenly divided: One in 5 Americans say college is always worth it, even if it means lots of debt. Another 1 in 5 say college is not worth it, period. Full stop.
The other 60% are in the middle: “College is worth the money, but not worth taking on too much debt.” I’m with the 60%, but I’d add two caveats. College is worth it, for most students, if you graduate and don’t borrow too much. I’d also say that it’s not really necessary to borrow too much.
This question is clouded by the fact that Americans aren’t always the best savers. Half of U.S. households have less than $4,830 in savings.
I know some folks have genuine hardship. I don’t want to minimize that. But I’ve lost track of how many “poor” families spend hundreds of dollars a year to have 100+ TV channels. Proverbs 13:22 says, “A good man leaves an inheritance to his children’s children.” The equivalent of leaving land to your offspring in biblical times is leaving your kids with the skills to earn a living for themselves. Our abilities in this area will vary, of course, but saving for college or career training is wise.
Even with parental saving, most students still need help paying for college. But what if I told you there was a better way than debt to get that extra help? This better way is particularly strategic for students who are most at risk for either not graduating or not earning much after graduating.
Income Share Agreements (ISAs)
If you were starting a business, you’d probably compare debt vs. equity financing. With debt, you borrow money from a lender at specific repayment terms. The lender must be repaid even if the business flops. On the plus side, if the business booms, you repay the lender and enjoy the rest of your profits. With equity, on the other hand, you sell a percentage of the business to an investor. If the business flops, you walk away. You weren’t in debt. If it booms, the investor makes bank along with you.
Income share agreements (ISAs) finance college students with equity rather than debt. As one school puts it, “It’s not a loan. And you’re not alone.” You risk your time, your investor risks the money. You’re agreeing to share some of your after-graduation salary with your investor for a specified period of time.
Every school is different in terms of how their ISAs are set up. For example, Purdue University makes about $10,000 per year available to sophomores, juniors and seniors. Suppose you’re the student taking them up on that offer. After graduation, you’d pay back 2-5% of your monthly income for up to 10 years, depending on your major. After this time window, you’d be free — even if you’ve chosen a low-paying career. On the other extreme, if you promptly strike it rich, you’d pay back $25K for every $10K you were provided. Then you’d be done.
Of course, if you’d known in advance you’d strike it rich that fast, you’d also have known it would be smarter to borrow that $10,000. That’s a key difference: There’s more downside and upside potential with student loans than with ISAs.
More Schools are Now Offering ISAs
Vemo Education is a start-up designed to help colleges and universities set up ISA programs for students. They design, implement and manage ISA programs for their university partners. Vemo’s website reports that we’ve gone from 1 school offering ISAs in 2016 to 42 schools offering them in 2018. That’s bigtime growth.
Critics of ISAs worry they’ll tilt the scale toward more lucrative careers. For example, using Purdue’s interactive tool, I compared “Anthropology” and “Chemical Engineering” for May 2020 graduates. An anthropology graduate would have to pay back 4.52% of his salary for the first 116 months (just under 10 years). A chemical engineering graduate would have to pay back only 2.57% of her salary for 88 months — less than 7.5 years.
That seems unfair on the surface, but peel back the onion. Based on salary projections, a $10,000 ISA would end up costing the anthropology graduate $16,311 over 116 months. The same ISA would cost the chemical engineering graduate $15,253 over 88 months. That’s a tiny difference — $900 over 7-10 years — relative to the huge difference in expected annual salary ($70K vs. $31K). The engineer makes higher monthly payments, for a shorter period of time, than the anthropologist. Because 2.57% of the engineer’s salary is more than 4.52% of the anthropologist’s earnings.
Don’t Undervalue Freedom
But here’s the real benefit for the anthropologist, and lots of other people: You don’t know what the decade after graduation holds. You may struggle — for at least a season — within this 10 year window. With ISAs, you can opt to travel or start a family. Your ISA payment term will be extended by the amount of time you take off, but there’s no interest accruing during that time, as with a loan.
If the anthropologist knew he’d make decent money (say $31K or more) over his whole first 10 years, maybe he’d be better off with the loan. But an ISA lowers his risk, freeing him to pursue his sense of God’s calling, even if the pay isn’t great.
No debt means no possibility of default. That’s worth something.
Even if a student ends up choosing a loan over an ISA, the deliberation itself is worthwhile. It’s an exercise that promotes a sense of ownership and personal responsibility.
Dr. Alex Chediak (Ph.D., U.C. Berkeley) is a professor and the author of Thriving at College (Tyndale House, 2011), a roadmap for how students can best navigate the challenges of their college years. His latest book is Beating the College Debt Trap. Learn more about him at www.alexchediak.com or follow him on Twitter (@chediak).