As concerns mount over rising student debt loads, income-share agreements have attracted attention as a possible funding alternative for students and families. These aren’t new — economist Milton Friedman developed the basic ISA framework in the 1950s.
But the concept received a major reboot when Purdue University–West Lafayette created its Back a Boiler income-share agreement fund.
Since Back a Boiler launched in 2016, nearly 500 Purdue students have enrolled in the fund for a total of $5.9 million. While the Purdue ISA fund is one of only a few ISA options available, more colleges and universities are exploring bringing this option to their own campuses. Here are five aspects about ISAs and the Purdue fund, in particular, that prospective borrowers should understand when considering this alternative to student loans.
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— ISA funding models: The way ISAs work, as originally imagined, is that private investors front funds to students to help them pay for college. The students in turn agree to pay the investors a certain percentage of their salary after graduation for a set period of time.
The Back a Boiler ISA fund puts a new spin on this by funding the program’s capital from philanthropic gifts and Purdue’s endowment.
This is an important distinction because one of the major arguments against ISAs is that private investors could refuse to fund certain high-risk pools of students, such as minorities, first-generation students or those pursuing lower-paying careers. In the Purdue program, this hasn’t been a problem, since so far ISAs have been granted to students pursuing more than 100 different majors at every college within the university.
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— Potentially higher payments: Supporters like to say that ISAs aren’t loans — and they’re not, in the most traditional sense. For instance, ISAs, including Purdue’s fund, don’t charge interest.
But that doesn’t mean students will pay back exactly how much they borrow. That’s because ISA repayment rises and falls with the student’s income during a prearranged period.
For example, you could agree to pay back 3 percent of your income for eight years. At the end of that time, you’ll be done with repayment regardless of the specific amount you paid back. If you earn less income than anticipated, you won’t have to worry about repaying the whole principal; if you earn more, you’ll pay back the principal and then some.
Purdue’s ISA program caps the total amount paid at 2.5 times the amount received. Potentially, this could be much higher than borrowers pay on federal student loans, particularly if they prepay interest.
— Similar protections as federal student loans: The Back a Boiler ISA has been designed with flexible repayment terms that mimic the federal student loan program. In addition to its income-based repayment structure, Back a Boiler offers a six-month grace period after the student graduates or drops below half-time enrollment, a pause in payment should the student become unemployed and forgiveness in the event of the student’s death or permanent disability.
These benefits are not as all-encompassing as those in the federal loan program, but they can help prevent students from falling behind on payment — potentially much more than a private loan might. Additionally, one positive difference between conventional student loans and the Purdue ISA fund for borrowers is that the latter is easier to discharge in bankruptcy.
Some members of Congress have introduced legislation that would more formally provide structured rules and regulations around how ISAs operate, such as whether they could be dischargeable in bankruptcy; but as of yet, there’s been no movement on these proposals.
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— Requires continuous documentation: To set their initial monthly payment, students must provide Purdue with documentation of salary at least one month before repayment begins. From there, students should ideally inform Purdue of any changes in monthly earned income within 30 days of the change. If they don’t, it will be adjusted during the annual reconciliation.
ISA recipients must annually certify their income with the provider. Under the Back a Boiler 2017 contract, each year the student must provide a completed and signed tax form as well as a year-end paystub or W-2 form. Purdue will then recalculate and adjust the monthly payment according to that income documentation.
This is similar to how federal student loan borrowers using income-based repayment plans must recertify their income — a process that’s had mixed results to date. Under the Purdue ISA, students who don’t provide updated income documentation are assigned a 10 percent increase in income. Even with that, if they don’t provide the documentation within one year of its due date, then those students are deemed to have defaulted on the ISA obligation.
— Strong default penalties: If students fail to make the monthly payment by the 10th day after the due date, Purdue will assess a late fee of the lesser of either 5 percent of the payment amount due or $5. If students fail to make any payment in full and on time for nine consecutive months, then they are deemed to have defaulted on the ISA obligation.
At that point, Purdue could decide to try and recover the payment cap, the highest amount the student could pay back under the ISA agreement, of 2.5 times the original amount the student received; possibly seize the student’s state tax refund; and make the student responsible for any legal fees and other collection costs Purdue incurs while attempting to recover the debt.
Ultimately, ISAs may not be called student loans, but they do share some significant features with the federal student loan program. As with loans, students need to read all the fine print. Know before you owe, because you will owe — regardless of whether you borrow a loan or enter into an ISA.
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Alternative to Student Loans: Income-Share Agreements originally appeared on usnews.com
