IN 2013 AND 2014, headlines heralded the rise of for-profit income share agreements binding young borrowers to private investors. Students who attracted financial support agreed to pay back their wealthy benefactors a percentage of their future incomes for a specified amount of time.
These contracts raised eyebrows. Critics noted the ISAs were structured to allow venture capitalists to profit directly from financially disadvantaged students.
But there was a subtler issue, too: These contracts rewarded students whose areas of study, credentials or business ideas made them most likely to garner the highest salaries.
“Investors were looking for pretty high returns,” says Casey Jennings, chief operating officer of 13th Avenue Funding, an ISA nonprofit. “They wanted the high performers.”
By 2019, several for-profit income share programs disappeared without fanfare. Newer models built directly into the financial aid systems at universities have elicited fewer predatory concerns.
Yet the uncomfortable truth remains that some students are safer bets than others.
Universities have long been loath to acknowledge the disparate career outcomes of their graduates. But with their own dollars invested in students, they’re not immune to the incentive to identify the likeliest winners, even if only to keep their books balanced.
After all, explains Miguel Palacios, assistant professor of finance at the University of Calgary: “They only get paid if the students do well.”
If college income share agreements only help students already primed to succeed, they could deepen economic disparities or discourage some fields of study. But proponents believe these contracts could benefit all students by forcing universities into more forthright conversations about the true value of the education options they offer.
“Income share agreements make institutions be honest about what they think students can do with their degrees,” says Terri Taylor, strategy director for postsecondary finance at the Lumina Foundation, which supports efforts to expand access to higher education.
Rethinking Tuition
Income share agreements inspire many analogies. From one vantage, they look like risk-management tools. From another, they resemble investments in early-stage human “startups.” A darker brush paints them as indentured servitude arrangements.
These metaphors miss the mark, says Tonio DeSorrento, CEO at Vemo Education, a company that runs income share agreement programs at dozens of universities and other education institutions.
“People talk about them as a better kind of student loan,” DeSorrento says. “That may be true, but it is not enough. Income share agreements are best used as a more fair, more transparent form of tuition.”
Rather than imposing a flat rate upfront, income share agreements allow colleges to charge a proportion of what graduates end up earning later, which makes the connection between tuition and wages more direct. Alumni only owe their alma maters to the extent that their degrees turn out to be valuable on the job market. If they can’t find work after graduating, they don’t have to make monthly payments.
This transactional model is catching on at coding boot camps, which use income share agreements and salary guarantees to persuade people that participating will pay off.
“We are highly motivated to make sure you get into a great-paying job,” says Adam Enbar, CEO of coding boot camp Flatiron School. “We like the idea that school is aligned with the outcome you’re looking for.”
Colleges that adopt the same mindset will stand out to consumers, DeSorrento believes, especially those who primarily view education as an investment in early-career success.
University leaders seem to think so, too. Small schools and major research universities alike have sought insight from Purdue University, an early adopter of income share agreements, according to president Mitchell Daniels Jr.: “The interest is building and building.”
Connecting Majors to the Job Market
The transparency income share agreements promise has the potential to distinguish not only universities from one another but also degree programs within each institution.
Colleges traditionally charge the same tuition rates across majors, which may shield the fact that graduates from different departments have divergent results on the entry-level job market. Data from the Georgetown Center on Education and the Workforce and the National Association of Colleges and Employers shows employers tend to pay a premium for workers with strong quantitative skills, and there’s a correlation between majoring in a topic that teaches those skills – such as engineering, computer science and finance – and later earning a high salary. Employers tend to pay less for caregiving, artistic and counseling skills; there’s a correlation between majoring in early childhood and elementary education, art and social work and later earning a lower wage.
Universities don’t typically advertise these stark salary contrasts, focusing instead on how their holistic curricula prepare students to be knowledgeable good citizens. For families looking for “upward economic mobility,” DeSorrento says, that may not cut it.
“These things have different outcomes. We think it’s unfair to hide that,” he says. “People deserve to make an informed decision.”
As universities adopt income share agreements to help students cover some tuition costs, that rhetoric may not prove persuasive to accountants either. To be sustainable, ISA programs need participants to pay back roughly equivalent sums of money, DeSorrento says. Using department outcome data, Vemo calculates each student’s probable income to set contract terms likely to yield adequate returns.
This explicitly links college majors with early-career financial success, making it easier for students to assess the likely results of their education decisions.
For example, Purdue’s income share tool clearly shows its formula. A computer science student of the class of 2021 who signs an agreement for $10,000 will pay back 2.81% over 88 months, while an elementary education student will have to pay back 4.97% over 116 months.
That’s because the future computer scientist can expect a starting salary of about $68,000, while the aspiring teacher can expect to earn only $30,000 a year, according to the tool. If the model proves accurate, both graduates will end up owing about $14,000 – which ultimately is a higher burden on the teacher.
“If this mechanism becomes more widespread, future students will see a very clear indication, in those rates, of what the market values,” Daniels says. “That will answer the question that so many of them have: which areas to study and concentrate in?”
Changing College Attitudes and Practices
Few would argue against helping students make informed choices about how to spend thousands of tuition dollars. Yet taken to an extreme, this kind of calculus has the potential to reduce the richness of a liberal arts education to dollars and cents, perhaps dissuading students from majors and career paths that could offer them personal fulfillment – and serve society at large.
“Income share agreements do not solve the problem, and in fact make it more clear: the fact that there are some fields that have high social value and little private value,” says Palacios, who helped found ISA company Lumni. “The concern that income share agreements would be onerous to teachers is a very valid concern.”
For professors in fields like history and English that have seen steady declines in enrollment, the emphasis ISAs place on future earnings may feel threatening. But leaders at the Lumina Foundation, which has given grants to help schools study the effects of their income share agreements, encourage college educators to “see this not as an advent of their extinction but really a challenge,” Taylor says.
Adding technology-skills training to liberal arts syllabi may improve the early-career outcomes of students who study those subjects, DeSorrento says, noting that liberal arts majors tend to outperform their peers at the mid-career mark, perhaps in part because they’ve built the interpersonal and communication skills employers expect of professionals.
“A school that has a strong classics department isn’t trying to get rid of it. They want to succeed with it,” DeSorrento says. “I think colleges will use what they learn from income share agreements to improve.”
Daniels doesn’t believe Purdue’s income share option sends a negative message about any department. Predictions that the ISA option would appeal only to students most likely to land first jobs with big paychecks proved false, he says: “We’ve had almost every major in the campus represented so far.”
And when Purdue’s income share system can rely on actual repayment data instead of predictions, rates will adjust.
“If liberal arts majors are finding employment and repaying at a pretty good rate, the market will lower the percentage required in the future,” Daniels says. “The early evidence is, no matter what their major, they’re going to be productively employed and honoring their contracts.”
