A New Way to Tackle Student Loan Debt: Innovative or Predatory?

By: Jeffrey Alderman, ACBSP President/CEO, jalderman@acbsp.org

It’s no secret that student loan debt in 2019 is at the highest point ever in the history of higher education. The most recent student loan debt statistics show just how serious the student loan debt crisis has now become. According to a recent article in Forbes, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone. Further, student loan debt is now the second highest consumer debt category, behind only mortgage debt, with borrowers on average owing more than $30,000 when they leave school; whether they graduate or not.

Not all the statistics are as grave, however, as a 2014 study by the Brookings Institute noted that “roughly one-quarter of the increase in student debt since 1989 can be directly attributed to Americans obtaining more education.” Most recent figures from the National Center for Education Statistics (NCES) show that students earned approximately 1.9 million bachelor’s degrees during the 2014 to 2015 school year — a 32 percent increase from 2005. And, despite the challenges of student debt, most people agree that earning a college degree is still a wise investment.

Not surprisingly, with so much debt and so much potential of graduating students, the marketplace is getting pretty creative when it comes to tackling student debt. In the past, companies often took on student debt as a recruitment tool. It was particularly effective for large companies as well as law firms, but as company and employee loyalty shifted during the last several decades; this model hasn’t been as widely embraced.

One of my sisters is a great example of this. She was a very successful executive with one of the big three automakers, working out of their world headquarters. They took on some of her undergraduate debt as well as paid the tuition for her master’s degree. In exchange, she signed a contract that would keep her at the company for at least five years with 20 percent of her graduate student loans being forgiven each year she remained with the company.

Fast forward a few months when layoffs swept through middle management and she was unfortunately laid off. Now, the company already had paid for the tuition, which my sister would not have to repay, and they lost the human expertise and leadership as well.

Soon, all companies realized that funding education may not be the best model and that’s when the burden of education, undergraduate and graduate studies, began shifting back to the consumers. Thus, the early beginnings of what we describe as the student loan crisis.

One of the new ways and burgeoning concepts to potentially alleviate the burden of student loans that is becoming more commonplace is this idea of an “Income Share Agreement.” Simply put, an income-sharing agreement, also known as an ISA, is a financial arrangement in which an investor takes on the burden of the student debt and the student then agrees to pay back a percentage of their income for a fixed number of years thereby providing a return on the investment.

This idea is certainly not new and is one that has been in existence for many years within professional sports. Say there’s a talented golfer who needs funding for equipment, tournament fees, and travel costs. Investors stake the athlete and then take a portion of any winnings. Sometimes this has proven very lucrative and sometimes very unprofitable. Of course, ISA’s with college graduates have less risk because eventually they will find employment.

Once a student graduates with an ISA, they then make a monthly payment, say 10 percent, of the compensation they earn. The less they make after graduation, the less they are required to pay, but for a longer time. If a graduate is not working, they don’t pay anything. The upside for students is that it lessens the stress and anxiety of monthly loan payments and there will be a cap in payments. In addition, the investor(s) may provide job placement assistance or career counseling. The downside, of course, is that traditional student loan payments might be actually lower than if you give a portion of a salary and you’re actually betting against yourself in this model.

I suspect that, for now, most of these ISA’s will be offered to those attending the top tier schools, but if the marketplace shows promise for both the student and the investor…the sky’s the limit. I am curious to get feedback from our members and whether you support the idea of ISA’s or what other ideas you have. Regardless, I believe there’s always room at the table for ideas that can make the world a better place.

As always, we are grateful for the trust you place in us,