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Getting Bullish on Income-Driven College Payments
29 Sep 2015
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by Audrey Peek

A handful of companies specialize in an unusual kind of investment: someone else’s education.

Income-share agreements (ISAs) are a private form of financial aid that offers cash for college now in return for a percentage of students’ future earnings over a set time, generally 10 years. It’s a small market: all students with ISAs today could probably fit inside one Greyhound bus. But it’s a market that’s likely to grow.

ISAs resemble income-driven repayment for student loans. The difference is that with ISAs students who get big paychecks after college or who didn’t read the fine print can end up paying more than they received.

ISAs are no cure-all for college affordability, especially for students from low-income backgrounds. The few companies that offer ISAs select students based on their likely return on investment, a process that favors wealthier students and those in comparatively lucrative graduate programs such as medicine and law.

Could ISAs be a viable solution for a large number of low-income undergraduate students if the option was more widely available?

Probably not – but there may be a way to make it make it work for more students…and companies.

In a new study, The Potential Market for Income Share Agreements Among Low-Income Undergraduates, we reviewed online applications from eight ISA funders, including the two that actively fund undergraduate students. Most funders, seeking safe investments, ask students for their credit scores, field of study, institution, education plans, and employment history so we compared these questions to the comparable characteristics of the entering, full-time, undergraduate student population (using the Department of Education’s 2004/2009 Beginning Postsecondary Students survey). Using current criteria, we found ISAs could serve only up to 5 percent of all low-income undergraduate students each year. No more than 7 percent of all students nationwide would likely be eligible.

More students could benefit from ISAs if funders flipped their investment model. Instead of funding a small number of students who might generate large returns on investment, funders could select a large number of students who would each generate more modest returns. On balance, this approach could yield a larger total return on investment. By our estimates, these changes could increase the ISA market to 18 percent of all low-income students and 14 percent of students nationwide.

Industry insiders expect the ISA market to continue to grow through 2016. Unknown is whether ISA funders will adopt selection criteria that could benefit more students from low-income backgrounds. Nor is there evidence that more students want ISAs, at least in the current form. In an upcoming report, we discuss findings from our interviews with students and parents from low-income backgrounds who were skeptical about the benefits of ISAs, particularly compared to student loans.

ISAs are an innovative way to pay for college that might benefit some students. But ISAs aren’t likely to reach their full potential without fundamentally rethinking who they could serve and how funders are repaid.

Audrey Peek is a Scholar in AIR’s Education Department.  She is a doctoral student researching income-driven loan repayment at George Washington University.

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