[A]s students increasingly struggle to get a handle on their college debt, some schools are offering an alternative to loans: tuition dollars in exchange for a share of a graduate’s future salary.
So-called income-share agreements aren’t a new idea – economist Milton Friedman first conceived of them in 1955. But spurred by the higher education affordability crisis, certain colleges – including in Vermont – are trying out the concept in practice. Most recently, Norwich University, a private military college in Northfield, announced it would try a pilot ISA program with a small cohort of students. According to Vemo Education, the Virginia-based technology company that created Norwich’s program, the school is the first in the state.
Lauren Wobby, Norwich’s chief financial officer, said the school had been mulling the concept for several years, after Vemo, which has also worked with Purdue University and Clarkson University in New York on ISA programs, first pitched them on the idea.
Norwich finally decided to try it out starting this fall. The program will be offered to about 50 students who once received federal Perkins loans – a program that wasn’t reauthorized by Congress – and about 25 seniors in their fifth year whose merit scholarships have run out.
“These two groups we’ve identified as being vulnerable, relative to finances being a barrier to completing their coursework. We want every student attending Norwich to graduate,” Wobby said.
Here’s how ISAs work: a student will sign a contract with a provider, in this case a school, agreeing to pay a set share of their income for a set period of time after graduation. In exchange, the ISA provider will front that student a set amount in tuition.
Proponents argue ISAs will encourage colleges to better help place graduates in higher-paying jobs, and create a financing system more in line with a graduate’s ability to pay.
At some schools, ISA programs are funded through their endowments or private investors. Norwich is fronting all of the money for the program out of its budget for now.
“I think colleges are responding to the fact that student debt is largely perceived as a crisis. And there are plenty of students who are nervous about taking on large amounts of debt. And the concept of an income-share agreement is somewhat sellable to those students,” said Clare McCann, the deputy director for federal higher education policy at New America, a Washington, D.C.-based think tank.
The upside is that because repayment is based on income, they can be less risky than traditional loans, she said. But because graduates are committed to paying a set share of their income, for a set amount of time, they can also end up paying far more – sometimes twice or three times – than what the ISA was worth in the first place.
Norwich’s ISA program will offer two sets of terms. For those students replacing merit scholarships with an ISA program, their contracts set the cap for repayment at the amount the school provided in the first place. That means a student replacing a $5,000 scholarship with an ISA won’t be asked to repay more than $5,000 – and could even pay back less, depending on their income over the course of their contract.
But students replacing a Perkins loans at Norwich with an ISA will have a “two-times cap” – meaning they could repay, at a maximum, twice the amount given to them for tuition by the school.
Vemo CEO Tonio DeSorrento said information about how often students end up repaying more – or less – than the initial amount just isn’t available.
“At this point, most students participating in ISA programs have not graduated yet, so it’s too early to have that data,” he said.
McCann said there are other potential problems with ISAs. On an institutional level, there are concerns that if better terms are offered to graduates in programs expected to yield higher incomes, that minority subgroups of students could systematically end up with worse rates.
And she cautioned students considering an ISA to consider what they’ll owe each month while also taking their traditional loans and expenses into account.
“Even if it were affordable on its own, ISAs often are not happening in isolation. They’re happening on top of other types of debt and payment structures,” she said.
Finally, the ISA market is, at this point, she said, virtually unregulated.
“As with all financial products, please read the fine print. But especially with income-share agreements, because there are so few rules on what they can do,” McCann said.
