A New Alternative to Student Loans (read with caution)

What if you could attend college without racking up debt?

This is the idea behind Income Share Agreements, or ISA's, a United States financial structure in which an individual or organization gives a fixed amount of money to a recipient who, in exchange, agrees to pay back a percentage of his/her income for a fixed number of years.

In other words: Frankie wishes to attend college without taking out a traditional loan, so the XYZ Foundation and their private equity partner ABC Capital front Frankie's tuition money under the condition that he will surrender a percentage of his future income for a given time after he graduates.

Today, ISA participants are few, numbering in the few thousands. But the idea is spreading. Purdue University's "Back a Boiler" program is so far the only the traditional four-year university with its own ISA program, which has disbursed $2.2 million to 160 juniors and seniors since it launched in 2016. Assuming success, investment experts such as FlowPoint Capital's Charles Trafton believe the ISA market could grow from $20M to $1B over the next five years.

Given the current climate -- in which student debt levels ballooned from $150 billion to $1.3 trillion from 2009 to 2017 -- the bet is more and more people will hop on the ISA bandwagon.

Of course, you have to pay -- eventually. Here's how it works, taking Purdue's program as an example:

1. Sign-up/apply for the ISA.

2. Complete degree.

3. Pay a portion of income earned for roughly 100 months, depending on major, or until you pay back 250 percent of Purdue's investment. (Caveat: If you make under $20,000 after graduation of remain unemployed, you do not have to pay back the ISA.)

Payback rates and terms vary depending on the major and year in school. For example, Purdue’s ISA calculator shows that junior year computer science majors receiving $15,000 would pay 4.22 percent of their income for 88 months after they graduate; economics majors would pay 5.55 percent of their income for 100 months; biology majors would pay 6.47 percent of their income for 112 months; and English majors would pay 7.45 percent of their income for 116 months. Rates are calculated based on expected future income for common career paths for these majors.

Will ISA's help or hurt today's students? Will ISA's incentivize students to take lower paying jobs (or avert work altogether) to lessen or negate their payback requirement? And what happens if students don't see the 3-4% year-over-year wage growth assumed in the payback model?

This is a trend to carefully study and monitor over the next few years, as tuition costs and student debt loads continue to reach unprecedented levels.

What caused the Student Loan Debt Crisis in the first place? Read "The Next Big Short" to find out more.

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