The student loan landscape has not changed much over the past decade. Individuals who do not have financial resources to pay for school outright typically must borrow loans from government or private sources to cover educational expenses and then must pay back this debt. However, income-share agreements can help pay for school and are a novel new way to structure education financing. As such, more schools should consider this unique way of paying for college and graduate school.
I first learned about income-share agreements by watching the Netflix series Money, Explained. I highly suggest that everyone watch this show. The episodes not only discussed student debt but a number of topics related to money that might interest individuals with financial issues.
In any case, as discussed in the Netflix show, and as revealed through my subsequent research, income-share agreements are not typical student loans. Rather than borrow student debt to finance a degree, students and funders sign an income-share agreement. Essentially, in exchange for the funder paying for educational costs, the funder will be entitled to a percentage of the student’s salary after that student graduates. The percentages and terms of years are variable, but it could be ten to twenty percent of a person’s income for a decade or longer.
One of the universities that is pioneering income-share agreements is Purdue University, which was featured in the Netflix show. Individuals seeking more information about this type of initiative should visit Purdue’s “Back a Boiler” page, and I like this slogan for such a program. The page clearly conveys information about income-share agreements and the success of the program at Purdue.
My initial thoughts of income-share agreements was that this sounded like a traditional income-driven repayment plans. As discussed in prior articles, income-driven repayment programs require borrowers to pay a set percentage of their income to student loans for a certain number of years, and after this time, the remaining balance is forgiven. The benefit of income-share agreements is that the borrower does not actually go into debt, which could have a number of advantages.
Student debt impacted me on a psychological level. I thought about the interest that accrued on my debt almost daily, and this impacted a number of life decisions I made. I would have been extremely happy to not have debt and to not accordingly have interest accrue on my debt. In order to eliminate the psychological impact of interest, I would have happily signed up for an income-share agreement.
Furthermore, there is much more risk sharing with income-share agreements than there is with typical loan agreements. With ordinary student loans, individuals generally need to repay the debt no matter what. Of course, people may get fired, suffer an illness, or experience other life events that can make repaying student loans difficult for a certain period of time. However, if you are simply required to provide a percentage of your income to funders, there is not as much of a downside if something happens such that you are unable to pay the allotted money for a period of time.
Of course, there could be potential downsides to income-share agreements. Such arrangements may not provide incentivizes for graduates to earn more money because the more money they earn, the more money they need to pay to the funder of the arrangement. I personally used a number of side-hustles to pay off my student loans, and if I needed to pay a portion of this income to funders, it might provide an incentive to make less money.
In addition, it seems like there might be a number of administrative challenges to instituting income-share agreements. For instance, people could fudge the numbers of how much money they make and try to keep some of their earnings “off the grid” so the amount of money they must pay to funders is reduced. Of course, graduates could presumably be required to provide pay stubs, tax documents, and other materials to prove how much money they make, but there still could be challenges.
Moreover, it is possible that graduates might realize some financial downsides to this type of arrangement. One collateral benefit of student loans is that this helps young adults build credit. College and graduate students might not have much of a financial and employment history, so it is difficult for them to improve their credit scores.
However, student loans allow students to open credit accounts early in their lives, and if these accounts stay in good standing, this can go a long way toward helping the credit scores of students and graduates. Indeed, I had a steadily increasing credit score throughout my student loan saga, and this empowered me to purchase a home and realize other financial goals as I entered adulthood. It is unclear if income-share agreements are reported to credit bureaus, but this seems unlikely. As a result, graduates may miss out on the opportunity to build credit if they participate in income-share agreements rather than borrower traditional student loans and pay back these sums.
All told, income-share agreements are an interesting model in the student loan space, and more institutions and investors should consider participating in such programs. Although there may be drawbacks to such arrangements, the benefits likely outweigh any disadvantages, and policymakers can work on improving such programs so that empower students to fund their educations without incurring some of the consequences of student debt.