Income share agreements have quickly gone from an interesting idea to a real possibility for many college students.
As someone who spends his time helping borrowers navigate student loan headaches and stand up to lenders, finding a better way to pay for college is a passion. However, I’m not ready to jump on the income share agreement bandwagon yet.
The concept of an income share agreement is pretty simple. Instead of borrowing money to pay for school, the student agrees that he or she will pay a percentage of their future income.
The big advantage of an income share agreement is that the student never has to worry about keeping up with huge student loan payments. If college doesn’t lead to a great income, the cost will be low.
I’ve long argued that there is a real risk to student loan borrowing, and an income share agreement greatly reduces this risk. If I were about to start my student debt adventure from the beginning, I’d be foolish not to consider an income share agreement.
That all being said, income share agreements make me really nervous.
Lenders Excel at Making Money
Anyone with student debt has seen the many ways lenders make a buck on student debt. Interest is charged on a daily basis. Late fees add up quickly if you fall behind or make an accounting error. They lobby for laws that protect lenders and their investors. Minimum payments are often set a levels so that borrowers pay mostly interest with very little actually reducing the principal balance.
If these same companies get into the income share agreement business, it wouldn’t be because suddenly turned charitable. For-profit companies exist to turn a profit. If they are providing students money for college, it is because they expect to turn a profit on the endeavor.
Some students might get the better end of the deal. Those that don’t finish school or find good jobs may come out way ahead on what they received compared to what they paid back. In order for lenders to be ok with this loss, they will have to make up for it with gains elsewhere. That means many students will not only repay the money they received for school, they will also have to pay enough to cover the losses on other students, and they will have to pay enough to generate a profit for the lenders. Otherwise the lenders wouldn’t be in the income share agreement business.
These agreements can also get complicated very quickly. Are payments based upon the borrowers salary or their take home pay? What about graduates who start a business… do the income share agreements try to claim a portion of the value of the business? Are all expected to pay at the same rate or are accommodations made for family size or regional cost of living?
Depending upon the agreement, borrowers may get a cap on how much they are excepted to pay, but that doesn’t change the business model of an income share agreement.
A Better Income Share Agreement
Advocates of income share agreements might say that students should be willing to pay more if they make more. That is the point. Income share agreements take the risk out of borrowing for college.
Fortunately for students, a better income share agreement already exists in the form of federal loans. Like income share agreements borrowers pay based upon what they make rather than what they owe. Unlike income share agreements, the most a student ever has to pay back is what they borrowed plus interest. There are massive premiums to be paid by the students who graduate and find great success.
In short, federal student loan borrowers are already getting many of the benefits of an income share agreement without having to deal with the major risks of an income share agreement.
The Real Problem
Income share agreements have appeal because many realize that the college funding model in the United States is broken. We already have $1.5 trillion in student loans and it continues to balloon. Innovation is needed. Income share agreements seem like innovation that could help.
The problem is that college costs have spiraled out of control. In the past college was almost always an excellent investment. The cost was reasonable given the large expected return. Today, the price of college may not reflect its true value. Even though wages have stagnated relative to inflation, the cost of college has skyrocketed compared to inflation.
Most high school students are not yet sophisticated consumers and for many college is still a necessity. The availability of seemingly unlimited amounts of student debt has helped create a situation where the price of college continues to grow.
Income share agreements will not do anything to address this fundamental issue. They will still provide money to students to attend college. As long as the money is still available to pay for school, colleges can continue to raise the bill.
The Next Steps
Just because income share agreements are scary doesn’t mean that they should be dismissed or ignored completely. Given the desperate college finance climate, more options can be a good thing. Students just need to be very careful with these agreements. They can be a good deal… but the potential exists for them to be a huge mistake.