ISAs

To solve workforce problems, first solve the student loan crisis

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Jul 10, 2019

In a beautifully generous gesture, billionaire alum Robert Smith announced in May that he would repay the student loans of Morehouse College’s entire graduating class. That the news was received with such ecstatic gratitude is as much a testament to the donation’s magnitude as it is to the tremendous burden that student loans have become to individuals and to the nation as a whole.

That burden extends beyond making the dollars and cents add up for each fixed monthly payment. There is evidence that borrowers will hastily take lower-paying jobs in unrelated fields to avoid defaulting, increasing their chances of being underemployed, a rut that often weighs down graduates — and the workforce — for decades. Seeking to shift this risk away from students, an increasing number of education providers are offering income share agreements, or ISAs, as a new way to pay.

While ISAs aren’t a silver bullet to fix the student debt crisis, they have the potential to align the incentives of education providers with the long-term outcomes of their students, revolutionizing higher education and enabling it to unleash a potent and dynamic workforce in the process.

How ISAs work

In an ISA, students pay no tuition upfront, instead repaying the education provider once employed as a fixed percentage of their income for a set period of time. These contracts typically have minimum income thresholds — students only start paying once their income exceeds a certain amount — and repayment caps, limiting the total tuition students will pay back.

Once the repayment period is up, the contract is fulfilled, even if the student pays less than the upfront tuition amount. This stands in stark contrast to student loans, whose time frames are based on whether or not the loan principal is paid down. Crucially, the longer a traditional loan lasts, the more interest that accrues.

Roughly 1 million students default on student loans each year. That ISAs help students avoid default is an obvious benefit. That they could catalyze innovation that drives value — and ultimately outcomes — for students and the workforce is also worth exploring.

Generating ROI for the student

Education providers are more likely to help students graduate and thrive in good jobs if that’s how they get paid. ISAs shift some of the risk of poor outcomes back onto providers, so that students aren’t stuck holding the bag if a program doesn’t generate good return on investment.

ISAs also provide a potential financial upside for education providers and future employers with coding bootcamps, incentivizing institutions to focus on the most important professional skills, technical and otherwise, support students during their training, and help them optimize their job searches.

In the case of nonprofit universities, the tuition paid by graduates with higher income can also subsidize the college education of future students.

In contrast, traditional student loan programs lack these incentive-aligning features. Education providers keep the full amount of tuition advanced in a loan regardless of their graduates’ outcomes. Income-based repayment programs offer a spin on student loans that shifts some downside risk away from students, but without aligning incentives—that risk goes to the taxpayer instead of the education provider.

Under an ISA, education providers are motivated to help their graduates quickly maximize their earning potential by seeking a good fit in the labor market and generating value for employers. In contrast, the student loan system’s loan revenues are maximized if students take longer to pay off their loans.

Increasing access to education and training

ISAs are also increasing access to education and training programs where traditional student aid is unavailable. In Colorado, ISAs help DACA students, who are excluded from federal aid programs, to access higher education. ISAs are also proliferating in the bootcamp space, where the vast majority of programs fall outside the Title IV system. These high-ROI programs have become an important part of the workforce talent pipeline in the increasingly important tech sector.

The student loan crisis will hang around our necks until we address several issues, including stopping and reversing the meteoric rise in tuition costs, improving degree programs’ workforce-alignment, and implementing innovative financing solutions beyond loans. ISAs incentivize education providers to take on those challenges, and surrounded by the right guardrails, ISAs can be a part of the solution we desperately need. There aren’t enough billionaires to go around.

This piece was originally published on Workscoop here.

As a research associate on the Christensen Institute's higher education team, Richard helps investigate novel business models in postsecondary education, professional development, and lifelong learning.