Editor’s note: This commentary is by Victor Ialeggio, of Randolph, who is musician, a guardian ad litem and a retired educator.
[A]s reported by VTDigger, Norwich University, along with numerous colleges and universities, has been contemplating for several years the implementation of what are called Income-Share Agreements (ISAs) in an attempt the university hopes will help reduce the debt burden students find themselves carrying as they graduate and begin a working life. An ISA program would offer students, especially those who would have been eligible for federally subsidized Perkins loans prior to 2017 (when the program was abandoned by Congress), an alternative to institutional and private loans — tuition dollars in exchange for a share of a graduate’s future salary.
As an pilot program, 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 and about 25 seniors in their fifth year whose merit scholarships have run out.
A few notes are in order:
Fifth-year students constitute a fairly small cohort at Norwich (as well as at other colleges or universities) relative to first- through fourth-year students. The one-time loan for fifth-year students, while a generous and thoughtful gesture, will not have a huge impact on the undergraduate student population overall, at Norwich or elsewhere.
First- through fourth-year students who were once deemed eligible for Perkins loans, however, represent (and will continue to represent) a very large cohort of students at Norwich, as well as at many other colleges and universities. So some important questions for the nascent (unregulated) ISA loan industry will be:
• Will students be “loaned” the full amount of tuition?
This is important as the percentage of freshmen paying full sticker price historically (1980s-2000s) has been approximately 40 percent. Times have changed, however. For freshmen entering private institutions in 2017, for example, the number of families paying full tuition fell to an all-time low of just 12 percent. The great majority of families sending students to not-for-profit private and public institutions settle on a package which significantly reduces the full tuition price through grants, scholarships and loans.
At Norwich, for example, with a tuition of $38,662, a prospective freshman with a high school GPA of 3.6 immediately qualifies for a $24,000 presidential scholarship, plus the possibility of a federal Pell grant and/or institutional grants, depending on individual and family contribution as determined by FAFSA. A minimum difference, therefore, of $14,662 per year, or $58,648 over a four-year college career.
It’s unclear whether ISA loans will be for nominal full tuition or for what would have been the annual capped amount of a Perkins loan (see note below). What effect, if any, will the issuance of ISA loans have on institutional offerings like the presidential scholarship?
• What will be the period of repayment? Five years, 10 years, open-ended? Will those terms be individually negotiated? Will it be possible to consolidate loans? Will short- or long-term deferments be available, and if so, will there be a penalty or surcharge attached?
• What will be the percentage of repayment over five years? Over 10 years? Fixed or variable over the term and will those terms be individually negotiated?
For sake of comparison, Perkins loans carried a fixed rate of 5 percent for a 10-year period, with undergraduate loan amounts capped at $5,500 per year and a lifetime maximum loan of $27,500. Those were offered as universal terms.
• What will be the penalties for late or defaulted repayment?
• Will there be a penalty for early repayment?
• What will keep colleges and universities from bundling these tuition loan obligations at a later date and selling them internationally to investors, as has been done with mortgages, car loans, private loans for post-secondary education and credit card debt?
• Will ISA loan obligations have the unintended consequence of depressing career choices graduates might make in an effort to limit their exposure to percentage debt repayment? (Unlikely perhaps, but there are always outliers so it’s a question worth asking.)
VTDigger reports: “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.”
There is, of course, according to the article, not a shred of evidence to support this claim as “most students participating in ISA programs have not graduated yet,” according Tonio Sorrento CEO of Vemo Education (a privately held, venture capital-backed company “providing a full-service approach to income-based student-financing solutions for higher education.”)
And finally, from the article: “the concept of an income-share agreement is somewhat sellable,” however, “minority subgroups of students could systematically end up with worse rates,” says Claire McGann of New America, a Google-funded think tank.
An essay question, then: In what ways does this scheme resemble indenture, and in what ways does it differ? How do you imagine loan terms might be tailored for different socio/economic groups of undergraduate students? How do you think the industry, as represented by Vemo, might expand were the use of ISA loans to become widespread?
