As politicians grapple with the issue of student debt, a few have turned to a novel financing option called income-share agreements (or ISAs) as one part of the solution on this issue. Presidential candidates Sen. Marco Rubio, R-Fla., who introduced ISA legislation in 2014, and Gov. Chris Christie of New Jersey both mentioned ISAs in major campaign speeches recently. And last week, Reps. Todd Young, R-Ind., and Jared Polis, D-Colo., introduced bipartisan legislation on this idea.
While garnering more attention recently, income-share agreements are still a relatively new addition to the public debate. As someone who has written favorably about them, I wanted to share my thoughts on questions and concerns commonly raised in response to the idea.
What are ISAs? An income-share agreement is an alternative to a student loan. Right now many students take on debt to help pay for school but later find themselves unable to afford their payments, either due to unemployment, struggles to find a well-paying job or other reasons. Some students even see their loan balance grow rather than shrink during these periods if they don’t cover continuously accruing interest.
Under an income-share agreement, a student agrees to pay an affordable percentage of his or her income for a set period after graduation in exchange for funds to help pay for school. Such an agreement is not a loan; there is no fixed amount the student must repay and no interest. Thus a student’s payments are always affordable and there is no balance to worry about.
Could a student end up paying more with an ISA than with a loan? Yes, though only if his or her income is higher after school. If it is lower, he or she will likely pay less than with a loan. In short, a loan has a fixed amount a student must repay but offers no guarantee of affordability. An income-share agreement has no fixed amount but will always ensure affordable payments.
Who would provide these? As with loans, any type of entity could offer them: for-profit companies, nonprofits or individuals. One example is a company called Lumni, which operates predominantly in Latin America but has also financed a small number of students in the U.S.
Would providers just fund students who are “sure bets,” such as elite students? Actually, a majority of the students Lumni has financed are “first generation” college students. Other providers focus specifically on students from disadvantaged backgrounds. In fact, income-share agreements would be most valuable to students who could benefit from education after high school (college or something else), don’t have the means to pay for it out-of-pocket, and are worried about taking on large amounts of debt for fear that they may struggle to repay it. This describes most low-income students and a rapidly growing share of middle-class America.
Fundamentally, what matters is whether a student can expect to earn a positive return from his or her education, on average – the case for many postsecondary programs. Some students will ultimately earn less and others more, but by investing in a larger number of students, providers can diversify these risks and earn a positive return overall. And because providers lose when students aren’t successful – they have “skin in the game” – they have a strong incentive to help students find worthwhile programs and avoid bad ones.
This sounds a bit like indentured servitude. Is it? As a colleague and I argued earlier this year, income-share agreements are quite the opposite. Indentured servitude involves pledging your future labor – that is, giving up your free will. In contrast, with ISAs (and loans) you’re simply getting money now in exchange for agreeing to make payments in the future. A student is free to choose his or her career and even whether or not to work at all.
In fact, because income-share agreements ensure affordable payments, they offer new levels of freedom from the constraints and anxiety associated with traditional student debt. Whereas a student with debt could see his or her career choices constrained for years or even decades, a student with an ISA could confidently follow his or her passion to public service, starting a business or other interests.
Wouldn’t students who expect to earn more choose not to participate? Potentially, however, students often don’t have a good sense of their future earnings years or even decades down the line, so many may prefer the “insurance” that an income-share agreement offers even if they think their initial earnings may be high. In addition, providers need not offer the same terms for every program.
Wouldn’t people with income-share agreements just choose to work less or take low-paying jobs? Maybe to a small degree, but given that the agreements would represent a relatively small fraction of income, it’s hard to imagine people making dramatic life changes to avoid the obligation; after all, people also like earning income.
Can’t federal loan borrowers already tie their payments to their income? Yes, but even with this option, called income-based repayment, roughly one in five undergraduate borrowers go into default. There may be many reasons for this: The federal loan system is extremely complicated, some borrowers are probably hesitant to see their loan balances grow for years or decades (even with the prospect of forgiveness), and forgiveness under income-based repayment is currently treated as taxable income. And defaults aside, income-based repayment as currently constituted is expensive and may not be fiscally sustainable for taxpayers.
While there are reforms that could address some of these challenges, even a reformed federal loan system would not fully meet the needs of many students. Many need to borrow more than federal limits allow, leading them to turn to highly imperfect options like parent loans, private loans and credit cards. Furthermore, federal loans aren’t available for many innovative programs like coding academies.
Why is legislation necessary? Income-share agreement are purely private; there is no government subsidy or backing. Because they are not loans, however, it’s not clear how they fit within existing legal and regulatory frameworks. Therefore, while there are a small number of companies and nonprofits offering them, regulatory uncertainty has made it more difficult for this market to grow.
Legislative efforts by Rubio (and retired Rep. Tom Petri, for whom I worked at the time) and Young and Polis don’t spend any money or take existing aid options away; they simply provide a legal framework, including consumer protections, for income-share agreements, with the hope of providing students with a wider array of beneficial financing options.
from AEI » Latest Content http://ift.tt/1eR9Hfe
0 التعليقات:
Post a Comment