What is an ISA?
Because current college payment alternatives only evaluate families ability to pay based on past performance there is no transparency to a student’s potential return on investment. For example, what did previous graduates with the same major do with that degree? Would greater transparency to outcomes and education results broaden consumer information, lead to more informed decisions, and improve school accountability? Is there a way to value an education based on outcomes?
Income Share Agreements (ISAs) are a new way to finance an education by committing a percentage of future income. Some important terminology:
- “Funding Amount” – means the cost of education provided by the school or the difference between the cost of education and the family’s expected contribution including traditional alternatives such as loans.
- “Monthly Payment” – means the agreed upon income share multiplied by the amount of the student’s monthly Gross Earned Income.
- “Earned Income” – means a person’s total wage and self-employment income.
- “Payment Term” – means the term, measured in months or years, during which a fixed percentage of Earned Income is paid. In certain situations, such as underemployment or unemployment, the Payment Term may be extended and the monthly payment will be $0.
- “Payment Cap” – means the maximum amount paid by a student over the Payment Term pursuant to an ISA.
Where did ISAs come from?
Milton Friedman proposed the concept in a 1955 essay where he argued students should be funded through “equity investment[s]” such that: “ [Investors] could ‘buy’ a share in an individual’s earning prospects to advance the funds needed to finance his training on condition he agree to pay the lender a specified fraction of his future earnings.”
In the 1970s, Yale University attempted a modified form of Friedman’s proposal with undergraduate students. In the Yale experiment, instead of making individual contracts for a fixed number of years, all participants agreed to pay back a percentage of earnings until the entire groups balance was repaid. The result left students frustrated they were paying more than their fair share by being forced to make payments on behalf of other students unwilling or unable to repay.
As college costs rise student need also escalates. In a recent study of new students by the National Center for Education Statistics, among the 3.7 million students who started college nearly half, around 1.7 million, received a Pell grant at some point during their college career, a rough proxy for being lower income (Wine, Janson, & Wheeless, 2011). An even greater number, about 2 million, relied on federal loans to finance some portion of their education. Given the depth of students’ financial need, it is easy to imagine that ISAs might grow over time to help a sizable share of the 18 million students enrolled in all levels of undergraduate study today (Ginder, Kelly-Reid, & Mann, 2014).
The most recent ISA activity coincides with the 2008 collapse of the bank based private student loan market. The first to enter the ISA space was Lumni, founded in Chile in 2002 and beginning operations in the United States in 2009. Shortly thereafter, it was joined by 13th Avenue (in 2009), Cumulus Funding (2011), Upstart (2012), and Pave (2012). During this same period, Social Finance, Inc. (SoFi; 2011) and CommonBond (2012) began offering student-loan products that reflected, in part, a “personal relationship” between investors and beneficiaries.