Mary Clare Amselem writes for the Martin Center about an option that helps college students avoid taking out federal loans.
A solution could lie in offering a more attractive alternative to the federal student loan system altogether while simultaneously holding colleges accountable for their cost and quality. Income Share Agreements—an old idea that has gained some fresh momentum—could be exactly what is needed.
A typical income share agreement (ISA) requires no upfront payment from the student. Rather, an investor pays the student’s college costs, and the student agrees to pay back a set percentage of their income for a set period of time to their investor after graduation. This percentage differs based on what students want to study and what the investor expects their future earnings to be.
The use of ISAs to finance college has several advantages. The first is obvious: it saves students from going into debt. Americans view college as an equalizing institution, and ISAs make it easier for students to succeed regardless of economic background.
Second, ISAs avoid many of the unintended consequences of the federal student loan system. Forty-four million Americans struggle with almost $1.5 trillion of student loan debt and making payments is difficult for many borrowers due to significant college tuition inflation.
Furthermore, ISAs could significantly improve transparency in higher education. Students will be more aware of their expected future earnings by major and can choose their field of study accordingly.