Should You Consider A College Income-Sharing Agreement (ISA)?
In order to make their institutions more affordable (or at least appear to be more affordable), colleges are now offering to concede tuition in return for a stake in their graduates' future earnings. In some cases, this is a gamble, depending on a graduate's ability to find a job that pays competitively. It's an opportunity that prospective collegians might consider investigating to see if the terms sound reasonable.
To offer some insights into the trading-tuition-for-equity situation, I cite an interesting article entitled Even More Colleges Are Now Taking Equity Stakes In Their Students As Tuition, which offers generous portions of content from the unfortunately paywalled source, The Wall Street Journal. If you're unfamiliar with equity for tuition, then here are some insights for you.
The Concept Is Not Completely New
The trend of colleges foregoing traditional tuition in favor of now taking an "equity stake" in their graduates looks like it is catching on.
The idea was first floated by Milton Friedman back in 1955, who suggested an incoming sharing agreement between the universities and the graduates once they enter the workforce and begin to earn a regular salary. This obviously shifts much of the liability to make "workforce ready" graduates to the institution.
As is the case with many of these kinds of articles, the writer cites examples of people experiencing the pros and cons of the circumstance under consideration. A Bloomberg Businessweek article, College Grads Sell Stakes in Themselves to Wall Street, profiles a woman who graduated with an equity stake obligation, noting, "Instead of taking out loans, students can agree to hand over part of their future earnings in return for investment."
To pay for college, Amy Wroblewski sold a piece of her future. Every month, for eight-and-a-half years, she must turn over a set percentage of her salary to investors. Today, about a year after graduation, Wroblewski makes $50,000 a year as a higher education recruiter in Winchester, Va. So the cut comes to $279 a month, less than her car payment.
If the 23-year-old becomes a star in her field, she could pay twice as much. If she loses her job, she won't have to pay anything, and investors will be out of luck until she finds work.
Wroblewski struck this unusual deal as an undergraduate at public Purdue University in West Lafayette, Ind. To fund part of the cost of her degree in strategy and organizational management, she sidestepped the common source of money, a student loan. Instead, she agreed to hand over part of her future earnings through a new kind of financial instrument called an income-sharing agreement, or ISA. In a sense, financiers are transforming student debtors into stock investments, with much of the same risk and, ideally, return …
You can see, then, that equity staking, also known as an income-sharing agreement (ISA), is a kind of dice rolling, which can yield dramatic results on both sides of the ledger. Getting back to the Journal, we read about Alex Ross, "... who took advantage of General Assembly coding school's $14,700 design boot camp. She hasn't been able to find work yet, but that's not bothering her, as she took advantage of General Assembly's income-share-agreement program, which requires her to make monthly payments of 10 percent of her paycheck for 48 months -- but only after she lands a job paying $40,000 per year or more." ...
No matter how much she earns, her payback won't exceed a $22,000 cap.
Ross said: "I considered taking out a loan, but didn't want to start making payments right away. I didn't want the pressure before I was employed full-time."
Tonio DeSorrento, co-founder and CEO of Vemo Education, a company that helps schools design and implement income sharing programs, said: "It's not the best thing for everyone, every time. But the fact that the school stands behind its product serves as proof it offers value."
There are now more than 60 universities that offer ISAs nationwide, including Purdue and the University of Utah. In the New York City metropolitan area, there is the Flatiron School and Holberton School, in addition to General Assembly.
Would You Sell Stock in Yourself?
Put another way, an April 2016 MarketWatch article asks, Would you sell stock in yourself to pay for college? Some students will soon have that option, and goes on to explain, using a specific school's example:
For many students, federal student loans don't cover the cost of college. Purdue University is aiming to be a pioneer in a way to help students bridge that gap.
The government caps the debt available to most students at roughly $27,000 (total) for four years of school. Given that the average cost of a year of public school was $9,410 and $32,405 a year at a four-year private school last academic year, it makes sense that many families need to find more revenue sources to finance college. Some turn to private loans taken out in either a parent's or the student's name, and others take advantage of Parent PLUS loans, which is the government loan option for parents.
Purdue is experimenting with a new way for borrowers to supplement their federal loans: Allowing students to sell stock in themselves. The university will start accepting applications next month for its Back a Boiler program (the school's students and alumni are called "Boilermakers"), which allows juniors and seniors to finance some of their education by pledging to pay back a portion of their salary over the next several years ...
The "pro" argument:
… Proponents also note that income-share agreements offer better protection to borrowers from economic uncertainty because the borrower pays a percentage of their income. The ISAs can also be discharged in bankruptcy, something that's nearly impossible to do with federal student loans ...
The "con" counterpoint:
… Still, the idea of asking students to pledge away a share of their future earnings strikes some as unseemly. Often proponents portray the programs as something different from a loan, but David Bergeron, a senior fellow at the Center for American Progress, a left-leaning think tank, said they essentially function as debt. "They start from a false premise which is this is free money, it's money that has to be repaid if your income supports it," he said … "all it does is provide an additional revenue stream for the institution over the long term. That seems to be doing something to benefit the institution and not really put the student first." ...
Is this something you may want to consider as you conduct your college search and process? Speaking for myself, if I were a college-bound high schooler, I may be tempted to dig deeper into an opportunity like this, especially if I came from a low-income family and couldn't gain acceptance to an elite college that offers to pay the way for students from economically disadvantaged families. FYI, here are some additonal colleges that currently offer ISAs: 8 Schools That Offer Bachelor's Degrees — and Income-Share Agreements.
However, if I did get close to entering into an ISA, I would certainly want legal advice before signing up. With the volatility of today's economic climate (can the stock market bull keep charging forever?) and the fickleness that some institutions exhibit when it comes to the almighty dollar, you should ask yourself whether entering into an ISA puts you on solid ground.
There are definite pluses and minuses to ISAs. How they all add up is subject to multiple circumstances, most of which are unknown at the time of your commitment. The non-ISA alternative may end up being significant long-term loan debt, thus an ISA can seem quite seductive. In the world of conundrums, perhaps the most pertinent question to be posed prior to making a decision is: Do you feel lucky?