Gabby Cerros has tried half a dozen jobs in the past two years, but the work she can find with her high school diploma doesn’t excite her.
So Cerros, whose family emigrated from Mexico to Colorado, enrolled in classes at Colorado Mountain College, determined to train for a fulfilling job outside of fast food restaurants and retail stores.
“I felt like if I went to college and I got a good career, I would enjoy my work and go every single day happy,” she says.
Tuition fees at CMC are among the lowest in the state. Still, to pay for her courses, Cerros needs to work at a hotel from 3 p.m. to 11 p.m., making reservations and checking in guests. As a recipient of the Deferred Action for Childhood Arrivals program, she is not eligible for federal education grants and loans.
When Cerros learned about Fund Sueños, an income share agreement that Colorado Mountain College created for students like her, she gladly took advantage of the opportunity to sign a contract for $1,000 in exchange for a promise to pay back a percentage of her future salary.
“It was perfect, because then I could take any classes I want and not have to worry about the payment right away,” Cerros says. “It made me happy about going to college even more, that I wasn’t going to be so stressed about paying so much.”
As income share agreements proliferate in college financial aid offices, proponents hope they’ll make higher education more accessible to low-income students, who enroll in and complete college at lower rates than their more affluent peers. These contracts may hold special promise for members of groups who don’t have access to federal financing, like immigrants who lack legal documentation or people who are incarcerated.
Not everyone is thrilled by the prospect of marketing income share agreements to students with few other options. ISAs remain largely unregulated. They offer less favorable terms than grants. And they don’t do much to address the systemic problems that make higher education so expensive in the first place, like declining state support for public universities.
“A good question to always ask is: Who benefits from this and who pays for it?” says Bill Moses, managing director of education at The Kresge Foundation, which works to improve higher education outcomes for poor and minority students. “Is this going to end up being paid for by low-income people?”
Yet so far, students seem receptive to the opportunities income share agreements provide to invest in themselves — while also creating a pool of resources that could help future students.
“What we heard from those students was the most motivating thing for them was the idea that they could pay it forward to the next generation,” says Matt Gianneschi, chief operating officer at Colorado Mountain College.
When students take out traditional loans, they’re responsible for set monthly payments no matter how well they ultimately fare. With income share agreements, though, the amount they owe is proportional to what they earn, providing some relief during lean months or years. Some contracts even come with minimum-income floors that delay borrowers’ payment obligations during periods when they make very little money.
“They act as insurance in case you have no income,” says Miguel Palacios, assistant professor of finance at the University of Calgary, who helped found income share company Lumni.
On the other end of the success spectrum, an income share agreement may prove extra burdensome to borrowers who end up making a lot of money. To address that problem, many ISAs come with caps to prevent borrowers with large salaries from having to pay back sums that are unreasonably high — and possibly even illegal under usury laws. Additionally, some have provisions that allow borrowers to terminate their contracts early by paying a lump sum.
Although early publicity highlighted income share companies that catered to young entrepreneurs, the private programs that have endured are designed to support students beyond the business school set.
Lumni, which has offered ISAs in Latin America since 2002 and the U.S. since 2009, creates room for “riskier” students to participate by asking investors to support “portfolios” of people rather than individuals and by hosting some explicitly philanthropic portfolios that promise lower returns on investment. About 70% of Lumni’s nearly 11,000 clients are first-generation college students and many come from low-income backgrounds, according to CEO Felipe Vergara.
The vast majority of Lumni’s clients live abroad, however. For most U.S. students, federal loans and grants are hard to beat.
“The U.S. government has a very generous financial aid policy,” Palacios says. “Most likely, all of the federal loans available to them are cheaper and they should start with that.”
A pilot program run by nonprofit 13th Avenue Funding offers a glimpse at how ISAs could play out. Using their personal finances and money raised from family, the nonprofit founders designed a contract that would grant up to $15,000 in tuition support to students willing to pay back 5% of their incomes for 15 years — if they earn at least $18,000. They asked leaders at Allan Hancock College, a community college in Santa Maria, California, to identify low-wealth students who were willing to participate.
“We have explicitly avoided trying to pick out the potentially best performers,” said Casey Jennings, chief operating officer of 13th Avenue Funding, in an email. “We think if students are willing to invest their time in going to college, we should fund them if possible.”
Four students signed on in 2012, and seven more followed in 2013. One has since died, but the remaining 10 went on to graduate from four-year institutions such as University of California at Berkeley, Sacramento State University and California Polytechnic State University at San Luis Obispo.
Four have also earned graduate degrees. One, who earned a master’s degree in education administration at Harvard, credited the financial help he received through his ISA with allowing him to take internships without worrying about debt, Jennings says.
The income share agreements haven’t guaranteed success for the pilot participants, though. Several have yet to find lucrative employment, despite having earned advanced degrees.
“It reflects the earnings situation for low-income, first-generation families in the U.S., not any failings on their part,” Jennings said. “At least they haven’t had to write us checks while they’re struggling.”
With classrooms in Aspen and Breckenridge, the 11 outposts of Colorado Mountain College sound more like ski resorts than campuses. The institution focuses on preparing students for “sustainable-wage jobs” in the rural-yet-expensive towns that dot the Rocky Mountains, offering a few bachelor’s degree and many associate degree and certificate programs in professional tracks such as nursing, teaching, law enforcement and firefighting.
Like Cerros, as many as 5% of the 18,000 students at CMC may lack legal documentation, Gianneschi estimates, making many of them eligible for in-state Colorado tuition but not federal grants and loans.
To help these students, the Colorado Mountain College Foundation solicited donations to start Fund Sueños, which gives them up to $3,000 per year (the cost of full tuition and fees). In return, they agree to pay back 4% of their future salaries for 60 months, as long as they make at least $30,000. Once students send in enough to match the amount they’ve borrowed, their obligation ends.
“The goal was to allow these students to enroll in college full time, to graduate sooner and to enter our workforce and be able to contribute to the communities that have allowed them to have college to begin with,” Gianneschi says.
Fund Sueños exemplifies the intriguing opportunities income share agreements present for people who, like DACA recipients, can’t take advantage of federal financing. Currently, only a small percentage of incarcerated people can access Pell Grants through a pilot program at certain universities, and they can’t take advantage of federal loans, says Julie Ajinkya, vice president of applied research at the Institute for Higher Education Policy. Additionally, some religious sects strongly discourage adherents from taking on debt, even to support education.
That’s the case for many undergraduates studying in the Wasatch Mountain foothills. Warnings from The Church of Jesus Christ of Latter-day Saints about the dangers of debt have permeated the culture at the University of Utah, instilling an aversion to borrowing money even among students who aren’t church members.
This fiscal responsibility has drawbacks, explains Courtney McBeth, special assistant to the university’s president and project director. Some students take only a few classes at a time, dragging out their education for years and delaying the career and salary benefits that come with earning a bachelor’s degree.
To encourage timely graduation, university leaders designed “Invest in U,” an ISA pilot program through which seniors in 18 majors could take $3,000 to $10,000 in class credits in exchange for a promise to pay 2.85% of their future salaries back for up to a decade.
Mitchel Kenney, a junior who is majoring in finance, enrolled in the University of Utah after completing a two-year mission for The Church of Jesus Christ of Latter-day Saints in Italy. After initially relying on scholarships and wages he earned from on-campus jobs to pay for his classes, he took out a loan last year, hoping it would allow him to cut back his work hours, study more and improve his grades. For his final year, he’s excited to take advantage of Invest in U instead.
“It’s nice to have something that’s a little bit closer to home,” says Kenney, who helped advise the university about the ISA program. “A student loan from the government can be a little intimidating for some students. An offering from the university, more students are likely to accept.”
Thinking Beyond Band-Aids
With income share programs in their infancy and almost totally unregulated, there’s plenty of skepticism about whether they’re the right tool to help low-income students pay for college. Some critics would rather see efforts to make community college free or extend Pell Grants and other federal financing options to more people.
After all, an ISA doesn’t do much to actually lower the price of tuition.
“It doesn’t make it more affordable; it makes it possible for you to pay for it,” Moses says.
Income share contracts may be less risky than loans, but for low-income people, even the opportunity to repay their obligations in proportion to their incomes doesn’t change the simple fact that education expenses are a bigger burden on the poor.
“It’s the same problem with basic taxes: Some costs are fixed, and it’s going to cost you more as a low-income person,” Moses says.
Ajinkya, who hasn’t encountered any ISAs designed for incarcerated students, doesn’t think the model would be a good fit for members of the “already-marginalized population.”
“These students don’t have a lot of flexibility in the post-secondary opportunities they are offered,” she says. “We’re concerned that institutions could create repayment terms that place an enormous burden on students who are already facing burdens upon reentry.”
With these concerns in mind, the Lumina Foundation has given grants to study the effects income share agreements have in Colorado and Utah.
“I think right now income share agreements are Band-Aids,” says Terri Taylor, strategy director for postsecondary finance at the foundation, which supports efforts to expand access to higher education. “You have to design them in a way so that students are protected and it’s not going to end up being a new chapter of the preying-on-students saga we’ve had in this country for a long time.”
Paying It Forward
While experts debate the best policies for tomorrow, students are worrying about tuition bills today. Among undergraduates at Colorado Mountain College and University of Utah, early reactions to the new income share programs have been pretty positive, students and administrators report.
“I think the students who actually need it are very excited about it,” says Devon Gethers, a finance major at the University of Utah who has helped advise the institution about Invest in U.
Some of the enthusiasm stems from the fact that these programs are designed as revolving funds that pass the money graduates return onto other low-income people. For students, this feels less like paying back debt and more like paying forward opportunity.
“It’s nice to know over time the money I pay back will be going to help a University of Utah student pay for their degree as well,” Kenney says.
And of course, students are eager to accomplish their own goals, too.
Cerros is using her ISA to pay for classes that prepare her to become a medical assistant. So far, she says, her courses have been more fun and interesting than the jobs she’s held.
One way she can tell she’s learning a lot: When she watches popular doctor drama “Grey’s Anatomy” now, she understands the medical terms the characters use.
“I hope I get right into the medical field and start doing hands-on training, because that helps me learn better,” she says. “I want to apply to a hospital right away.”
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For Poor Students, Income Share Agreements May Offer Opportunity originally appeared on usnews.com
Clarification 05/21/19: This story has been updated to clarify that the Colorado Mountain College Foundation solicited donor funds to start Fund Sueños.