A new idea called “income share agreements” could help solve the student debt crisis.
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Student loan debt keeps growing!
President Obama blamed that on greedy bankers — “unnecessary middle men”.
Senators said they’d fix things. “Take the banker out of the picture, because they’re taking a profit!” shouted Sen. Durbin. He and Obama got their way, and the government took over student loans in 2010. President Obama promised “We’ll save American taxpayers 68 billion dollars.”
But the government takeover didn’t save tax money. Student debt just kept rising.
Part of the problem is that cheap government loans invite students to take on debt without even thinking about whether they will earn enough money to pay it back.
Democratic Presidential frontrunner Elizabeth Warren wants to solve the massive student debt problem by having government forgive nearly all of it. That’d cost taxpayers a massive $1.25 trillion.
A better solution, says Beth Akers, author of “Game of Loans” and a Senior Fellow at The Manhattan Institute, is something called an ISA: an “Income Share Agreement”.
ISAs mean, instead of incurring loan debt, students agree to pay a percentage of their FUTURE income.
“The ISA is a way for the school to say to [a student], ‘you’re only going to pay us if we help you succeed,'” Akers explains.
Private computer coding boot-camps already do that. Now universities are experimenting with ISAs.
A big benefit is that the lenders have skin in the game — they care about being paid back. They guide students to higher paying careers, and warn them that some majors probably won’t lead to jobs that pay as well.
At Purdue University, English majors with a $10,000 ISA loan must pay, after graduation, 4.58% of their income for 116 months. Math majors pay less–3.96% for 96 months. The difference, of course, is because students majoring in math are expected to earn more; investors expect they’ll need less time to recoup their investment.
Two students with ISAs told me they much prefer ISAs to debt.
“It is a win-win situation for everyone involved in it,” said Purdue graduate Andrew Hoyler, who’s just started working as a pilot.
“We don’t know who the investor is, but I’d love to give him a hug or buy him a beer or something,” Engineering student Paul Laurora added.
Still, some people say ISAs are unfair. A Vice headline called them “indentured servitude.”
I told Laurora and Hoyler what some critics say: “You’re locked into paying all these months.”
“If you’re graduating and you don’t have a job, you’re not paying anything! Where’s the servitude in that?” Paul asked.
Good point. I hope ISAs will lead to less debt and more responsible college decisions.