Income Share Agreements: Better than Loans?

How Do Income Share Agreements Work?

For families struggling for a way to pay for college without saddling themselves or their children with decades of debt, Purdue University in West Lafayette, Ind., is offering a new option—the Income Share Agreement.

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So how do income share agreements work? Already in use in countries outside of North America, Income Share Agreements  (ISA) are beginning to take hold in the United States, with Purdue’s Back A Boiler program (referencing its team nickname, the Boilermakers) among the first. With an ISA, students receive money upfront for their college education. But this isn’t a loan that they pay back with interest. Instead, once they graduate and start working, they pay a percentage of their earnings for a fixed time period—under Purdue’s program, nine years. While for some high earners an ISA could cost more than a typical student or parent loan, for others, the cost is the same or less than other options.

Costs aside, Income Share Agreements offer several advantages over student loans: they have a limited payback period; they’re suspended with no payments due if the recipient is ever without a job; and they can be forgiven in bankruptcy. On the downside, payments can fluctuate (although some programs offer caps) and you can’t pay them back early. Plus, they aren’t regulated as loans are, so they don’t afford the same consumer protections.

We asked Brian Edelman, Chief Operating Officer of the Purdue Research Foundation and the lead of the Back A Boiler—Income Share Agreement Fund, about why Purdue decided to offer ISAs and what this could mean for students and their families. To learn more about the program, go to Purdue’s Back A Boiler page.

MCPT: Where did the idea for this program come from?

EDELMAN: The idea originated from well-known economist Milton Friedman in the 1950s. It is used in several countries outside North America. Purdue University President Mitch Daniels spoke before the U.S. Congress in March 2015 and discussed the matter as a way to reduce student debt.

MCPT: Why did Purdue decide to implement Back A Boiler?

EDELMAN: The response of Pres. Daniels Congressional presentation from educators, parents and thought leaders was overwhelmingly positive. At that time, Purdue decided to “explore” the possibility of offering such a program. Purdue did not decide to implement the Back a Boiler–ISA Fund until we were fully satisfied that it could be a strong alternative to private and Parent Plus loans. We conducted multiple surveys with students and parents to gauge their interest and how the program could help students. That is when Purdue decided to move forward and offer the program on a test basis for the 2016/17 academic year.

MCPT: What groups of students do you anticipate this program will help the most?

EDELMAN: Any student who has exhausted their other means of educational support–savings, federally subsidized student loans, grants, scholarships, etc. Students who are looking at a private or Parent Plus loan are the ones who may most benefit from an ISA fund.

MCPT: Applications for Back A Boiler just opened in May. What has the response been so far?

EDELMAN: We anticipated we could offer the program to 300 students in the 2016-‘17 academic year. In less than a month after accepting applications, we have 122 students approved for the program. Our expectation was that we would have about half that by this time. The primary questions of concern we receive are “When will I receive an answer to my application?” and “How much will I need to pay once I graduate?” A comparison tool shows within a small percentage how much a student will pay depending on their funding amount, major, and anticipated salary.

MCPT: Where is the funding for this program coming from?

EDELMAN: The Purdue Research Foundation, a nonprofit, privately funded entity created in 1930 to serve Purdue University, is funding the test program. Any monies collected by the Foundation in the future from this program will go back into the program.

MCPT: Since the loans are paid back based on a student’s earnings, are the students who go into fields such as engineering where their potential earnings are higher more likely to receive these loans than students in the arts or other traditionally lower-paying fields?

EDELMAN: More than 60 different unique majors are represented in the 122 approved applications. Every single college is represented and the distribution is fairly equal among engineering, liberal arts, technology, science, agriculture, human sciences.

MCPT: What happens if a student takes out a Back A Boiler loan but then six months or a year later changes his or her major to something that could lead to a less lucrative career? Would this affect their loan in any way?

EDELMAN: The Back A Boiler contract allows for academic change and only after the student graduates is the contract finalized depending on the student’s income. Payments begin six months after graduation. Unlike a conventional private or parent loan, there are protections for students. For example, if a student earns less than $20,000 a year they pay nothing. If they file bankruptcy, the debt is listed as an unsecured financial obligation so they will pay a fraction of the costs–unlike conventional student loans that are not forgiven in bankruptcy.

MCPT: The program is initially being offered to juniors and seniors. When will it be available to all students?

EDELMAN: That depends on the availability of funding and the success of this test phase. We have not established a timeline for expanding the offering but anticipate that we will at some point.