Income Share Agreements 101: A Conversation with Dr. Melanie Zaber
Free the Facts’ Tom Church interviewed Dr. Melanie Zaber of the RAND Corporation at Monday’s Fall Tour event
How can income share agreements change the way we look at student loans? To answer this question and more, FtF’s very own Senior Policy Advisor Tom Church spoke with Dr. Melanie Zaber, an associate economist at the RAND Corporation, a non-partisan global think tank.
So what exactly are income share agreements, or ISAs for short?
In the context of higher education, an ISA is one way of financing a degree by pairing your repayment plan with your post-graduation income. Rather than agreeing to repay a fixed amount of money plus interest, as is the case with traditional student loans, under an ISA, you commit to paying a certain percentage of your income over a set period of time.
After that set period of time passes, and regardless of whether you’ve paid all of the amount you borrowed or not, the repayment plan ends.
The institution issuing the ISA sets a minimum income threshold that would trigger a payment. For example, if the threshold is set at $35,000 and the first job a graduate lands pays $30,000 annually, the repayment obligation is removed. However, the period of time spent earring $30,000 still counts towards the payment plan period - even though no payments are actually being made. Once the graduate’s earnings reach $35,000, however, an agreed-upon percentage of the income is paid to the institution.
So, ISAs serve as an incentive for these institutions to help graduates find a good job, because their repayment depends on it.
Income share agreements are starting to gain traction with institutions across the country. Schools like Purdue University and the University of Utah have pioneered efforts to expand ISAs. However, at most schools, they only serve as a back-up for subsidized federal student loans. According to Dr. Zaber, this is one of the reasons why many institutions reserve ISAs as a “stopgap funding solution” for upperclassmen who have already exhausted their traditional loan options.
“I don't think [ISAs] will ever supplant subsidized federal student loans,” said Dr. Zaber. “As long as the federal government continues to subsidize student loans, that is the first stop for any student who needs to take out money for school.”
In other words, ISAs tend to serve as alternatives to private loans rather than federal ones.
Whether or not this is the best option for a student depends on how they predict their career paths to turn out. If they’re in a field that’s likely to yield high earnings, an ISA might not be the best plan because they’ll have to pay back a percentage of their income - and with a high salary, that can end up being more than the amount they borrowed.
“It's not that you're getting an amazing deal on one side or the other,” Dr. Zaber explained, “it's that you've got this kind of insurance protection against being unemployed, against having lower incomes, [and] against any kind of adverse conditions that might happen... like pandemic protection.”
Church then pointed out that income share agreements can be a risk for the institutions as well. With federal loans, schools are sheltered from the financial risk because the government takes it on. Dr. Zaber replied that while there is an inherent risk for institutions, it is a calculated one. “ISAs are really new, so the sustainability of this model hasn’t been proven yet,” she said, adding, “but I do think we can see them becoming more sustainable if they get the pricing algorithm right.”
Since this is a relatively new financing option, it remains to be seen whether or not schools decide to continue using it down the line.
The conversation also covered the logistics of ISAs. Audience questions included, “How can institutions ensure graduates are following their repayment plans?” and “What happens if a person decides to attend graduate school in the middle of a repayment timeline?”
The ISA contracts usually have provisions in place to account for these situations. There are provisions that allow schools to report to credit bureaus in the cases of failure to repayment. And as far as life changes that interrupt a payment timeline, the clock is usually paused and resumed whenever they leave and reenter the workforce.
“Why wasn’t this around when I went to school?” joked Church during the event wrap-up. At the end of the day, ISAs are a new proposal and it’s still too early to determine whether they are a sustainable option for institutions. But as more experiments are conducted and more schools begin to offer them, that answer will quickly become clear.
To learn more about income share agreements, you can also read this article, co-authored by Dr. Zaber herself!