More than 20 million students are enrolled in American colleges and universities, according to the U.S. Department of Education, and most of them are making an incredibly risky bet. If they cannot get a decent job after graduation, they are still on the hook for potentially crippling student loan debt. But a new college financing arrangement is aimed at reducing that risk. Instead of taking out loans, the student agrees to pay back a portion of his or her income for a set period after they graduate.
Purdue University says it is the first four-year institution in the country to offer the option, known as an income-sharing agreement, or ISA. Under Purdue's Back a Boiler program, graduates make payments for 10 years after graduation. The percentage graduates pay depends on their major and the amount of funding they receive. The less they make, the less they are required to pay. And if they do not work, they do not pay anything.
"It gives them certainty and some protection and safety. They're not going to have that much money borrowed, piling up, compound interest whether they're doing well or not," said Purdue President Mitch Daniels, who is a former Indiana governor and White House budget director under President George W. Bush.
On the flipside, there is a cap on the total payments if the student does well.
Charlotte Herbert, a 2017 graduate who got a job as a technical writer making about $32,000 per year, financed her senior year through the program. She is paying back about 10 percent of her income, which she said is a better deal than the loan payments she and her parents must make to cover her first three years.
"I don't have to look at the debate between making the minimum payment and putting in a lot but putting a big dent in the rest of my finances, which is what I have to do with regular loans," she said.
Education major Savannah Williams says the program is giving her some peace of mind as she pursues her dream of becoming an elementary school teacher.
"It's really nice for me because I'm going to be a teacher and I won't make a whole lot of income in the future," she said.
ISAs are also attracting attention in vocational schools.
San Francisco-based Lambda School is an online computer coding school that is entirely based on ISAs. Students pay nothing upfront in exchange for 17 percent of their income for two years, but only if they get a job paying at least $50,000 per year. The school also offers the option of paying $20,000 upfront for the 30-week program.
Co-founder Austen Allred believes ISAs will become the standard in vocational education in the future. He is looking to expand the school's offerings into other areas, like health care.
"If your job as a school is effectively promising a job, it doesn't make sense that student pays you a bunch of money that doesn't work out on the other side," he said.
Allred says investors seem to like the model. He says the company has raised about $48 million in its one-and-a-half years of existence.
But there remain questions about whether ISAs are sustainable in the long run.
Purdue's Mitch Daniels, who believes the university's program could be a national model, notes that the program is still small, and the exact financial formula needed to make it work is still to be determined.
"For this to become a viable additional option ... we need scale," he said. "And we need other schools and many more students participating so that the marketplace of potential investors sees repayment history and we all learn more about how well this works."
Purdue's program is funded through the university's research foundation with support from private investors.
Also a concern: The programs are mostly unregulated, unlike traditional student loans. While both Purdue and Lambda School offer upside and downside protection for students, there is nothing to require that.
The programs also do not tackle the underlying issue: that college tuition is rising at roughly twice the rate of inflation. While Purdue has managed to freeze tuition for seven years in a row, the average net cost of a four-year public university has risen 30 percent over the past 10 years, according to College Board.
"Quite honestly, the single biggest thing that could happen is if other schools are careful about what they charge in the first place," Daniels said. "You never have to borrow money you weren't charged."
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