Are Income-Share Agreements the Answer to Ballooning Student Debt?
Supporters of ISAs argue income-share agreements have the benefit of relieving the taxpayer burden of financing students, but should student debt be forgiven altogether?
Student loans are a hot topic in today’s political climate, particularly with Democratic candidates Elizabeth Warran and Bernie Sanders pledging to forgive loans and make higher education free if they are elected. The present situation is proving itself untenable as student loan debt has reached $1.6 trillion according to the Department of Education. Waiting on a possible Democratic presidency plus the additional time spent on passing new legislation has others looking for viable alternative strategies – enter the idea of income-share agreements (ISAs).
What are Income-Share Agreements?
At the 2019 Federal Student Aid Training Conference for Financial Aid Professionals, Michael Brickman of the Education Department introduced a new idea the department is weighing for loan repayment: income-share agreements. Although these essentially act as loans, they differ in how they are repaid. Instead of a fixed amount calculated by principal and interest, income-share agreement payments are determined by, as the name suggests, income. A similar method is already offered through standard student loans in income-based repayment plans.
According to The New York Times, a bill has already been introduced in Congress to codify the new method of repayment and some universities have already begun offering it. Purdue, for example, alters the percentage owed and the term length based on the degree obtained. For example, philosophy graduates would have longer term lengths and higher percentages than a computer science major due to expected incomes.
Todd Young, Republican Senator for Indiana, argued in favor of it in an opinion piece for the Kokomo Tribune.
“In a political season when we find opposing sides disagreeing on so many things, we can all agree that education after high school is too expensive. Student debt, and traditional student loan arrangements, have become a burden on Americans striving to build better lives for themselves and their families,” Young wrote. “We need to look for a solution and find a responsible middle ground that lies somewhere in between doing nothing and paying tens of billions of dollars a year for students to attend college.”
Income-Share Agreements or Student Loan Forgiveness?
Income-share agreements, Young argues, are a better alternative to shifting the student debt responsibility to taxpayers under proposals from Warren and Sanders. Their ideas, he said, would potentially result in taxpayers footing the bill for incomplete degrees. In one case Young cited, a Navy veteran was unable to afford education under the traditional loan setup, but an income-share agreement through the Kenzie Academy in Indiana offered the opportunity.
A supporter of the ISA Student Protection Act, Young argued that the framework is “student-focused” and would eliminate the taxpayer burden. These arrangements have the benefit of being based solely on a student’s projected income after graduation, rather than calculating eligibility from family income, including parents and spouses.
The Trump administration is developing a program to both promote income-share agreements and limit student access to federal loans, Politico reported. The first stage of the program would impose federal limits on loan amounts from Washington as determined by “academic program, credential level, year in school, expected earnings after graduation, or other factors.”
The administration anticipates its reforms will create savings for taxpayers by reducing the number of defaulters. The pilot program would also allow federal funds to be used for income-share agreements. On the surface, it may seem that ISAs are a positive step toward solving the student debt crisis, but there are potential downsides.
ISAs Have Downsides Too
In order for income-share agreements to work, they require students to provide proof of their income. As Kevin Carey pointed out in an article for the New York Times, requirements for providing proof could be burdensome and the consequences of insufficient evidence may push loans to collections, garnishment, or default.
Another potential issue is when students have an ISA in addition to standard federal loans. Because they will need to pay a percentage of their income toward the ISA, the amount they have to pay toward their federal loans would be reduced.
Finally, institutions advertising income-share agreements as more affordable, such as Purdue, may steer students away from federal loans, which have more protections and repayment options. If a student’s financial situation changes, they can alter their payment plans to a structure that better suits them whereas the ISA terms are dictated before a student even graduates.
There is no one-size-fits-all option in the world of student financial aid, but ISAs could benefit some borrowers. Recognizing this, the Department of Education and Congress are attempting to bring regulation to ISAs. Supporters of ISAs argue income-share agreements have the benefit of relieving the taxpayer burden of financing students, but ISAs are not a silver bullet for student debt. Additionally, ISA’s are unlikely to sway those who support Sanders’ and Warren’s plans for student loan forgiveness.