I explained in two past articles that student debt is a real problem and that universities have encouraged it through their own irresponsible behavior. With new college graduates facing an uncertain financial future, so it’s particularly important to find solutions that work. So, what’s to be done?
Some radical proposals, like completely privatizing student loans and making them subject to bankruptcy protection, would certainly work. Private lenders who put their own money on the line would do due diligence before lending to 18-year-old customers. And the fear of students filing for bankruptcy would ensure that loans are small and prudent.
But such a solution is politically unpopular. It would considerably reduce the number of students able to borrow for college and would disproportionately affect low-income students. It would also disfavor students majoring in soft but trendy disciplines.
But there are solutions that can be implemented — even in this acrimonious political climate.
The first solution has been referred to as “skin in the game.” Such a policy would call for institutions to have a share in the credit risk of every student who takes out a loan to attend the institution. In practice, this means that universities would be on the hook for some part of student loan debt when students default. Such a policy would require action by Congress since student loans are disbursed by the federal government.
But another solution can be implemented locally. A number of institutions are already giving it a try: Income Share Agreements (ISAs). ISAs are contractual agreements in which students receive education funding in exchange for a predetermined percent of post-graduation income over a certain number of years. The percent of income and number of years can change based upon a student’s major and income potential.
ISAs are a good deal for students because they are less risky than loans. Imagine a student who graduates but is only able to find low-paying work. Under an ISA agreement, he would owe an agreed-upon percentage of his income — the actual dollar amount would be very low. With a traditional loan, he would owe the same amount regardless of his income. Even with income-based repayment on his loan, he would likely make interest-only payments as the principal continued to mount.
Purdue University is already experimenting with ISAs under its “Back a Boiler” plan. The program is being funded by the Purdue Research Foundation, part of the university’s endowment. It’s a small program now but is already showing positive results. Purdue’s website explains a few of the benefits of ISAs:
The standard payment period for the Back a Boiler-ISA Fund is about 10 years, making it competitive with most Federal Plus and private loan terms. In addition, all students receive a six-month grace period post-graduation before payments begin. Once a recipient makes successful payments for the prescribed term of the contract, no additional payments are required even if they have paid less than the amount of funding they received.
Both ISAs and skin in the game policies would have many down-stream benefits. Both would put pressure on universities to keep tuition low and offset some of the artificial pressure on demand for higher education. They would also align universities’ interests with those of students. Universities would be invested in student success, not just increased enrollment. Some universities would probably begin to offer better guidance to students when they choose majors, choose classes and take out loans.
These innovative solutions will do what “Free College” cannot: make students and universities behave more wisely and act together towards the same goal. That goal is to create educated, wise and productive graduates. Only with smart policies that incentivize student success can we ensure that colleges truly provide value for students, parents, taxpayers and society.