Monday, February 20, 2017

Purdue in Forbes: What's up with Income Sharing Agreements?



Purdue's Income Sharing Agreement Solution To The Student Debt Crisis
Jon Hartley, Forbes Contributor

As the new school year commences, many college students will finance their skyrocketing tuition through student debt, adding on to the existing $1.3 trillion in total student loans outstanding in the United States. Over 100 students entering their third and fourth years at Purdue University are taking an alternative path, by pledging a portion (or percent) of their future salaries as part of a new Income Sharing Agreement (ISA) initiative known as "Back-A-Boiler." The average Purdue student enrolled will receive $13,789 in funding with the promise to pay it back as a small fraction of their income over 6 to 10 years after graduation. A brainchild of Milton Friedman now championed by former Indiana Governor and current Purdue President Mitch Daniels, ISAs provide an alternative financing option for Purdue students that puts less pressure on students to meet high-interest payments while facing uncertain job prospects. After having spoken to President Daniels and students enrolling in Back-A-Boiler like Purdue management major Amy Wroblewski who is entering a $13,514 contract to fund her junior year, I am confident Purdue’s Income Sharing funding mechanism should assuage the chief concerns of ISA critics and provide a template for other schools across the country to replicate.

Over 60 different majors at Purdue from liberal arts majors to computer engineering majors receive ISA backing

First, no student major is ineligible for ISA funding from Purdue (which is backed by Purdue's research foundation as well as an external investor) despite the liberal belief that only computer science or engineering majors could receive funding under such a framework. The 60 different majors at Purdue receiving Back-A-Boiler ISA funding include but are not limited to various liberal arts majors, business majors and science majors. Indeed, those with higher paying job prospects face lower repayment rates. For instance, a computer science senior will pay 2.57% of post-grad pre-tax income over 7.3 years for $10,000 of tuition paid through an ISA while a liberal arts senior will pay 4.52% of their post-grad pre-tax income over 9.7 years for the same amount. Purdue’s "Back-A-Boiler" program dispels the myth that liberal arts majors could never get funded under an ISA system. Those in majors with lower earning power post-graduation are simply given a longer pay back runway along with a higher payback rate that remains within reason.

Gradually students will be incentivized to pursue majors with better post-college prospects

Second, if scaled to the national level, such differences in ISA repayment rates over time would slowly incentivize students to study majors with better post-college prospects improving the efficiency of our education system in preparing students for higher income earning jobs. Sen. Marco Rubio, who has previously introduced legislation to create a better national legal framework for ISAs, made a related argument when in the fourth Republican primary debate he suggested that “we need more welders and less philosophers,” insinuating that structural education reform should focus more on vocational training career paths with more stable post-college career outcomes. ISAs would create better incentives for students to pursue more stable career outcomes rather than saddle many college graduates with debt and weak job prospects.

Compared to federal student loans, ISAs which offer post-collegiate risk diversification can hardly be called "usury"

Finally, such repayment rates at Purdue are relatively low compared to federal student loans that they could never honestly be called “usury” or “indentured servitude." Purdue prevents even the possibility of so-called “usury” by capping any potential ISA at 15% of total post-grad pre-tax income. Recent analysis of government data finds that the average 2015 college graduate with student debt will have to pay back slightly more than $35,000, many with little or no grace period, meaning interest payments are due immediately upon graduation unlike ISAs which only require payments contingent on a post-college income stream. Given this fact, how can anyone possibly continue to call ISAs “usury” while not apply the same label to federal student loans? For these reasons, ISAs could be near ready to be brought to national level and could play an integral part in education reform. The possibility of a recession occurring in the next few years is a real one. Academic economists like Lisa Kahn at the Yale School of Management have found that recessions can have a seriously negative long-run impact on college students who graduate in Recession years and ISAs offer students an opportunity to insure against recession risk. Sallie Mae student loans demand fixed interest payments upon graduation regardless of macroeconomic conditions. That being said, ISAs alone will not quell rising tuition borne by guaranteed government debt that gives Universities every incentive to increase tuition without any accountability for student outcomes. A recent study by researchers at the Federal Reserve Bank of New York confirms this phenomenon. Education reform plans that impose risk sharing on colleges that accept government backed Sallie Mae loans need to be implemented to solve the national tuition problem. In addition, ISAs may still need a better legal framework in some states to ensure that investors are protected from students refusing to pay their agreed upon income shares. The Purdue "Back-A-Boiler" program in time should also provide some evidence that a legal framework for ISAs exists, assuming student default rates are low. In the meantime, ISAs in some states can give students some immediate financial relief through diversifying the risk associated with their post-college income. For over 100 students at Purdue, they already have.

You can read the original article here


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