Last week’s post about the massive national student debt
load, depressing as it might have been, ended on the positive note that
innovative thinking might produce alternatives to students piling on more debt
to get to graduation day. MarketWatch recently highlighted a
creative program implemented at Purdue
University
Last year Purdue began promoting Income Share Agreements (ISA’s)
as an alternative to private loans and parent PLUS loans. In the Back a Boiler program (Purdue’s
students and alumni are called Boilermakers) the Purdue Research Foundation fronts
money to pay for a student’s education in return for a share of his earnings
once he graduates. Purdue adjusts the
payment terms according to the student’s chosen major and a projection of his
earnings after graduation.
ISA’s differ from loans in that no interest accrues. The graduate pays a fixed percentage of income
for a defined period of time. In the
handful of comparisons I did on the program’s website, the percentage was
always slightly less than 5%. As the
recipient’s salary grows during the term of the ISA, the real dollar payment
amount increases. Students who meet the
expected starting salary range and income growth projections will end up paying
more than the amount they received in funding.
Nevertheless, Back a Boiler includes high- and low-end protections for
the recipients. Those earning less than
a designated minimum amount will not be responsible for making payments; and
those with substantially larger incomes will have a cap on the total amount
they pay back.
When I first read about Back a Boiler I feared it would
unfairly favor those majoring in science, technology, engineering, and math
(STEM). But the online comparison tool
looks like it applies payment terms very even-handedly. Theodore Malone, the university’s Executive
Director of Financial Aid, confirmed that the foundation sets up the terms so
on average people pay a similar amount for equal funding, regardless of chosen
field of study. Indeed, he reports that
in its first year the program’s pool of recipients, in 80 majors, represented
every undergraduate college at Purdue.
I like the non-debt aspect of ISA’s. Yes, it does have the feel of a loan, but
unlike a debt to a bank, the ISA affords some protections to a graduate,
especially if his income falls or ceases altogether due to unemployment. The obligation to pay may end well before the
full amount is repaid. Traditional loans
are more likely to put a borrower’s credit score in jeopardy.
An ISA can also save the student’s parents’ retirement. Federal Direct loans are limited to $31,000
over a dependent student’s college career, with Perkins loans of an additional
$5500 per year available for those in exceptional need. After these government-subsidized loan
options are exhausted, parents often help by taking out PLUS loans or loans
from private banks, generally paying higher interest rates and diminishing what
they can put away in their retirement accounts.
That may mean twenty-five years down the road they become a financial
burden on their mid-career child. If
there is one financial crisis in the United States
But beyond these benefits, the investment mindset of the ISA appeals to me. Purdue is
financing a portion of the beneficiaries’ educational expenses with the
expectation that over time it will get the money back, and more. The university essentially has skin in the
game; if it doesn’t offer a quality education and produce graduates that
employers want to hire, it stands to lose money by backing its Boilers. I think Purdue is making a bold statement
about its confidence in its own product at a time when employment right after
college graduation is not guaranteed.
Mr. Malone stated that Purdue is trying to lure outside
money into its ISA program. I think that
is ideal, especially if that money is not treated as an endowment but as an
investment that the investor may pull out at any time (within reason). Such an arrangement makes contributors—people
and institutions in the community—investors in the university and its
students. This three-way partnership can
promote quality and good educational outcomes that lead to good jobs.
I do have some concerns about ISA’s:
- Purdue’s Back a Boiler program is not intended to replace federally subsidized loans. So an ISA graduate will likely end up with both loans to pay back AND a percentage of his income committed to repaying the ISA.
- Will ISA’s incentivize students to study to earn the backer’s upfront money? I hope the backers are smart enough to write into the ISA some provision for what grade point average constitutes an acceptable level to retain them as a backer.
- Will ISA’s channel graduates into big business or STEM careers instead of entrepreneurship? This might happen if outside investors are permitted to select only students in certain fields of study for backing. Most job growth is generated by small businesses.
- There is likely to be some fine print to these agreements. What happens if the graduate dies early or becomes disabled, for example. It’s “buyer beware” for all the parties of an ISA.
But at least someone is trying something different.
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