As the American student debt crisis continues to grow, educators are beginning to explore alternative ways of financing education.
On Thursday, the San Diego Workforce Partnership (SDWP), a non-profit workforce development board, and the University of California San Diego Extension school (UCSDx) announced the Workforce ISA Fund. An ISA, or an "income share agreement," is a contract between a student and a training program or school. Students are not required to contribute to the cost of their education or training upfront. Instead, they agree to contribute a pre-determined percentage of their income once they have completed the program and are gainfully employed.
Organizations that participate are incentivized to prepare students to be competitive candidates for in-demand jobs — in fact their future funding is dependent on graduates securing paid employment.
"An ISA acts very differently than a loan," Josh Shapiro, assistant dean of research affairs at UCSDx, said during the program's announcement. "A loan is debt. It's an obligation that needs to be repaid regardless of circumstance, and an ISA flips the model and it can be seen as an investment in an individual that is only repaid contingent upon students' success."
It's a concept that's gaining traction. In 2016, Purdue University became one of the first major universities to launch an ISA, the Back A Boiler program, which gave roughly $2 million to 160 Purdue students during the 2016 - 2017 school year. Since then, other large universities, including the University of Utah have rolled out similar programs. According to NPR, colleges in Colorado, Pennsylvania and New York also are launching ISA programs.
Andy Hall, COO of the SDWP tells CNBC Make It that the Workforce ISA Fund is the "first ISA originated by a public workforce development board and the first in the UC system." He and Shapiro expect that the ISA will support 500 students by 2021 and will be fully self-sustaining by 2025.
"Our philanthropic dollars are taking risks for students' success, and we think that's how it should be," he says. "The more successful we are, the larger the fund gets and the more we can sustain it and scale it."
The SDWP has raised $3.35 million for the fund over the past several years, including a $1.2 million gift from Strada Education Network, an education non-profit based in Indianapolis, a $1.2 million gift The James Irvine Foundation, a private non-profit grant-making foundation based in California and a $450,000 donation from Google.org.
The Workforce ISA Fund will allow 100 students to take a six-month online and in-person course at UCSDx in digital marketing, business intelligence, Java programming or web development. The course would ordinarily cost $6,500. Graduates are not expected to make contributions to pay back the cost of the course until they have a job that pays at least $40,000 a year.
Hall says the program has received about 320 applications so far for the courses, the first of which begins in July. He says over 90% of current applicants are first-generation college students, and nearly 30% qualify for public food assistance.
Income share details vary across the four programs based on projected earnings, but graduates can expect to contribute anywhere from 36 monthly payments of 6% of their income to 60 payments of 8% of their income. Graduates are not expected to pay more than 1.8 times the cost of the program, or about $11,700.
Critics have raised concerns about the fact that ISA participants often end up paying more, ultimately, than the total cost of the program.
According to the Bureau of Labor Statistics, the median salary for a computer programmer in 2018 was $84,280. Under San Diego's Workforce ISA Fund, a Java programmer contributing 6% of their salary in 36 monthly payments would end up paying significantly more than the face value of the program. That's why repayment is capped at 1.8 times the cost of the program.
Darrell Silver is the CEO and co-founder of Thinkful, an online coding school. Two years ago, Thinkful began offering an ISA payment plan for their courses worth about $10,000. Silver says between 20% to 25% of Thinkful's students select an ISA plan wherein graduates who make over $40,000 pay 15% of their salary for three years. Payment is capped at $28,000.
"It's good for the student, because even though ISAs are often more expensive than other options, the lowered risk for the student can be very meaningful, and it allows a lot of students to trust in us," Silver tells CNBC Make It. "Many students who choose ISAs even though they could afford a traditional monthly payment are saying to themselves, 'Look, I'm happy to pay more later, but I just don't want to get suckered into an education that that may or may not work. And I'll pay more for that privilege.'"
That overpayment is also what makes ISAs self-funding — programs that consistently graduate high-earning students receive additional funds they can use to expand the program. "You are paying it forward for your neighbor to have a shot," says Hall. "None of our financing partners are going to get any return on this. It's just about sustainability and scalability."
Andrew Dunckleman, Head of Education and Economic Opportunity at Google.org tells CNBC Make It that the organization intends to invest roughly $2 million across several ISA experiments around the country as part of a larger commitment to invest $50 million towards economic opportunities initiatives between 2018 and 2019.
"We know that people are going to need faster access to skills, more dynamic ways of building skills, instead of just one-and-done college education," says Dunckleman. "In order to promote that new way of thinking about skills, we're going to need new financing mechanisms."
He points to pointing to research from the Bookings Institution that estimates that over two-thirds of jobs today require a medium or high-level of digital skills. Dunckleman says that while ISAs may not eliminate the issue of student debt, they could provide a sustainable model to help workers gain skills that employers like Google have an increased demand for.
Though ISA proponents are enthusiastic about the potential of this new financing mechanism, the programs currently active are still too new to clearly indicate the potential success of ISAs and their graduates in the future.
"We are still in the very early stages of figuring out what this model is going to look like at scale. More innovation, more pilots, more practice is welcomed to figure out how we can really make this a tool for people," says Dunckleman. "We believe that there's a lot of interest and excitement in these alternative programs, but it's still pretty early to understand if they're having meaningful impact on people's jobs and wages."
"ISA programs have great potential, but it's going to take some time to sort out some of the challenges and issues that there may be," said Christopher Guidry, VP at Strada Education Network, during the announcement. "Hopefully the federal government will continue to monitor the progress of private ISAs and the ISAs that are working at Purdue as well."
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