By: Luke Morgan
There is no doubt that the cost of college is a deepening private and public concern that, without creative solutions, will not change. According to the Federal Reserve’s FRED Database, outstanding student debt in 2018 is over $1.5 trillion. The U.S. Bureau of Labor Statistics estimates that from 1997 to 2017 the relative price of college tuition fees has risen over 150 percentwhile the American Enterprise Institute pegs the relative price increase of college textbooks at about 200 percent. Comparatively, housing costs about 75 percent more, while many consumer goods like new cars and TVs cost anywhere from about the same to 100 percent cheaper. Many would-be students find that directly entering the job market after completing secondary education is a better bet than pursuing a degree, whiledropout rates of college students are largely made up of low-income studentswho can’t afford to finish. The social costs of high college expenses are magnified by the relegation of talented individuals to low-wage jobs, rendering many unable to contribute more broadly to the economy in terms of both consumption and skilled work–putting a down payment on a house or opening a small tech business, for instance. It is imperative that we find alternative ways for students to pay for university or otherwise empower those with potential for innovation to contribute to the economyin meaningful ways.
Many advocate making public universities tuition-freein order to reduce financial barriers to higher education. But paying universities’ tuition costs with public funds threatens to create budgetary issues for federal and state governments already saddled with debt, forcing them to choose between investment in high-quality education and provision of other public services, like maintenance on infrastructure and basic healthcare services. At best, it proposes a system that would highlight inconsistencies between states’ financial capabilities to provide public goods and the administrative capabilities of the federal government. Others, like Senators Marco Rubio (R-FL) and Michael Bennet (D-CO), call for an expansion in college accreditationto spur competition among universities and extending eligibility to federal financial aid for their students, theoretically driving down costs and widening application pools to ensure access to education for anyone who is capable of entering into and finishing a degree program. The two have introduced bills to do so several times to no avail.
An alternative proposal that is being tested at Purdue University, among others, is to promote an individual contract called an income share agreement (ISA) as a way to pay for college. ISAs allow students to enter into repayment contracts with universities, who bear part of the cost of attendance while students are still in school in exchange for a percentage of their salary after graduation, or with private investment groups such as FlowPoint Education Managementor Lumni. Unlike federal or private loans, which offer several income-based payment plans but charge interest and are limited to loan types and qualifications, ISAs are designed not to charge interest but instead to charge a flat rate on income over a specified period. Moreover, they provide low-income families a more feasible option to finance a higher education: the provision of ISAs is not tied to a credit score and transfers the burden of payment from parents as guarantors to a student’s future income. If the student is unable to fully compensate investors by the time the repayment period ends, there is nothing more to pay. The investors simply lose money. While it is possible that borrowers end up paying more in the long run than federal loans, ISAs can be combined with other forms of financial aid to make for a more manageable financial situation and would likely be utilized in lieu of private loans to cover costs in excess of those provided by subsidized federal loans. Although mostly unregulated at this point, there have been recent attemptsat regulating ISAs in order to combat predatory lending practices and other potential downsides of the investment scheme.
Undeniably, this would change the incentives of both universities and students. For universities who implement ISAs using endowment money–an investment to grow the resources of the school in the long term–the motivation to take a more active role in students’ selection for well-paying jobs would increase. Instead of simply providing resources for appropriate career selection, they would have a much stronger incentive to consider their students’ career outcomesto decrease the risk of theirinvestment. They may even modify the curriculum to reflect the demands of the modern economy. ISAs also increase the likelihood that more potential applicants will find a college degree more attainable and thus make applicant pools more competitive on average. These universities, in turn, will be able to make more careful selections in the application process and see better performance from students not burdened by long hours at part- or full-time jobs. Other universities, in an attempt to remain competitive, might follow suit or reduce their tuition costs due to the increased opportunity cost of charging a bloated tuition bill.
Private groups who offer ISAs would encourage students to make more deliberate educational choices, as firms would be much more willing to contract with students who are likely to be able to fulfill their total payments before the repayment period expires. Students would receive more favorable contract terms for selecting into low-risk degrees. Those who choose to pursue higher-risk degrees would often still be able to obtain contract offers with less favorable terms (i.e., higher payment rates), but would not be faced with the pressure of interest accruing during deferment or forbearance periods for the portion of their university costs covered by ISAs.
Income share agreements ensure that whoever is investing in the education of America’s future researchers, businesspeople, authors, scientists, and innovators will see a return on investment and make an increasingly essential university degree accessible to more individuals. To be sure, only universities confident in their students’ futures will take part, at first. But expanding the options of students to finance their upward mobility will inspire other college payment plan innovations and reduce the barriers to obtaining a college degree for many who have been left out.