By Betsy Prueter and Nicholas Brock
In a recent paper from the Brookings Institution, Income Share Agreements (ISAs) are proposed as part of the solution to address rising higher education debt. ISAs provide students with a fixed amount of money to put towards the cost of their college education in exchange for a promise that they dedicate a portion of their future income towards repayment. Unlike federal student loans, in which the amount borrowed is set in advance, students who use ISAs to borrow money will repay an amount to be determined by their actual earnings. For instance, a graduate who earns a lower salary than expected will likely not pay back the full amount of the loan while graduates who earn more than expected will likely pay back more than they received. Although ISAs are not common in the United States, the paper argues that due to their potential advantages in the higher education financing system, they deserve more attention. For example: – ISAs enable students to “collateralize” their financing with future earnings, just as home buyers do with mortgages. – This helps to reallocate the risk of financing a college education with real concerns about success in the labor market. – ISAs offer protection similar to that offered by the Federal Loan programs and could be structured such that the cash flows were similar to those of the federal loan program (even with income based repayment if it were so desired).
– Overall, ISAs may be a better option than Income Based Repayment (IBR) as IBR is not taken advantage of by many borrowers nor does not take into account a student’s future income prospects.
– Additionally, ISAs may encourage institutions to price programs based on labor market return (i.e., disciplines that tend to lead students into lower paying occupations may reduce tuition accordingly). – There may also be potential psychological benefits to ISAs as research indicates that debt often causes borrowers to feel more of a burden than they do for other expenses.
– Due to the way ISAs are framed, unlike traditional student loans and debt, it might help alleviate some of this burden.