Income-share agreements (ISAs), in which students pay reduced tuition up front for a portion of their salary after graduation, are part of the new strategy to expand access, increase affordability, and reduce the risk students run in paying for college, according to Vemo Education, a company that handles income-based student-financing solutions. And a growing number of colleges and universities have recently implemented ISAs as a new, student-centric model that aligns costs with outcomes.
Unlike student loans, ISAs have a fixed number of payments. This may result in a student paying less or more than the total tuition reduction they received during enrollment, but the income-share agreement is always capped at an amount that will not exceed some multiplier (e.g., 1x, 2x, 2.5x).
ISAs let universities show that they stand behind their “product” by taking on part of the risk to finance it. However, if a student doesn’t make a minimum income, no repayments are required. On the other hand, if the student exceeds income expectations, the university receives a bonus on its investment—up to a point.
For example, Messiah College in Pennsylvania reduces tuition for its students by $5,000 annually if the students agree to make 84 payments over seven years equal to three percent of their post-graduate income. After graduation, their risk is capped by limiting total repayment to 1.6 times the amount of tuition reduction (e.g., $5,000 x 1.6 = $8,000). And if that cap is reached early, no more payments for the student. But payment will be waived for Messiah graduates whose annual salary is less than $25,000, according to the Messiah website. Unlike traditional student loan programs, the ISA covers undergraduates and some graduate students.
Another benefit of ISAs is that universities can customize them. Norwich University in Vermont offers a specialized ISA for “super seniors,” or fifth-year students. “Our merit scholarships are only for four years, and students who cannot complete their degrees in four years may not be able to cover the costs beyond that with gift aid, loans, or their own resources,” says Lauren Wobby, chief financial officer and treasurer. “If those three options are closed you need to come up with an alternative.”
Norwich also offers ISAs to undergraduates who need funding to replace student loan programs like Perkins Loans, which were not extended in 2017.
So, do ISAs make sense?
Having launched its Back a Boiler ISA program in 2016, Purdue University in Indiana has funded more than 500 contracts for a total funding amount of $6 million, according to Mary-Claire Cartwright, vice president of information technology and Back a Boiler program manager. “I would recommend other colleges or universities look at ISAs as a way of aligning risks and outcomes,” she says. “It provides a way for the school to get skin in the game and provide a bit more risk sharing between school and student.” In the final analysis, if the student doesn’t succeed, the school doesn’t succeed, according to Cartwright.
Derek Handova is a project-based content marketer and freelance journalist who has contributed to FCW (Federal Computer Week), Channel Futures, IPWatchdog, B2B News Network, Energy Central, and Economy Lead. He started his career in the consumer publishing sector working for automotive publications associated with Motor Trend and Hot Rod magazines.
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