Income Share Agreements (ISAs) have increasingly been touted as a potential solution to the student debt crisis.
In theory, it sounds like a good idea. Rather than paying huge sums of money towards a dreaded student loan, students who used ISAs are only required to pay what they can afford. Borrowers pay a percentage of their income, and those with lower earnings may not have to pay at all. It gives schools an added incentive to help grads find jobs and protects the students who don’t benefit from college.
Unfortunately, ISAs would function more as a temporary band-aid than an actual cure to the student loan crisis.
ISAs Don’t Fix the High Cost of College
The student loan crisis has reached crisis status because attending college has become unreasonably expensive.
Like many other purported solutions, Income Share Agreements wouldn’t move the needle on college prices. Instead, an ISA would become a new form of student debt.
Rather than making college more affordable, an ISA would present the exorbitant cost in a more palatable manner. Paying a small percentage of future income may seem far more reasonable than borrowing $40,000 per year for tuition.
For ISAs to Work, They Must be Profitable
The income share business won’t be sustainable unless the lenders are making money.
If ISAs don’t generate profits in the long run, funding will dry up.
From the perspective of the student population, this means that as a collective group, students will still be paying the full price of college plus interest.
While ISAs would arguably protect students from the horrors of massive student debt with little to no income, they would still function similarly to student loans: Colleges get paid large sums of money upfront. Lenders, whether student loan companies or ISA companies, get their capital back plus interest. Graduates will still spend decades repaying the debt.
ISAs would also carry many of the same flaws as student loans…
Those following the student loan crisis know that one of the major problems is that 18-year-old students rarely understand the consequences of their borrowing decisions. Many parents poorly grasp the impact of student loans.
Income Share Agreements risk similar confusion. Pay-what-you-can-afford sounds nice in theory, but it leaves many questions unanswered. What is considered income for the purposes of the ISA? What if the student doesn’t finish school or get a job in their field? Do cost of living expenses, family size, or health issues impact ISA payments?
Like student loans, ISAs are complicated financial documents. Like student loans, they may increase access to college. But, like student loans, they will help mask the true cost of a college education.
Students viewing the cost of college through the rose-colored glasses of an ISA is potentially dangerous. Having yet another student debt vehicle will empower schools to continue to inflate the cost of college without fear of the well of student funds running dry.
Whether the debt is called a student loan or an Income Share Agreement, borrowers still face the possibility of decades of life-altering bills.
If the big selling point of an ISA is the protection for graduates who don’t earn money, such a product already exists.
Federal student loans all have income-driven repayment plans available. Borrowers earning beneath 150% of the poverty level can qualify for $0 per month payments, and after 20 or 25 years, the borrower is relieved of their obligation to pay.
By utilizing federal student loans, borrowers can arguably get the best aspects of an ISA and the best aspects of a student loan in one product.
A Real Solution
To fix the student loan crisis, college has to become more affordable.
Because college is so expensive, public and private efforts have been made to provide access to the necessary funds. As a result, it is relatively easy to get student loans. With easy access to funding, colleges can continue to raise prices. Until this back-and-forth is slowed or stopped, college will continue to be expensive, and the student loan crisis will linger.
ISAs may offer an interesting alternative to student loans, but the marginal benefits may only serve to prolong an already vicious cycle of student debt.