Federal Policy

Do income-share agreements actually work to hold down college costs? We’re finding out.

Terri Taylor, Elizabeth GarlowJuly 18, 2019

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This summer marks the third anniversary of year-round Pell grants, where students can receive extra Pell funding to enroll in summer classes and complete their programs faster. Summer Pell is a critical resource, but it doesn’t begin to solve all of the affordability issues facing today’s students, including federal aid restrictions for many student populations, the pressure of costs beyond tuition (such as childcare), and lack of financing options for quality workforce training programs.

These challenges help explain why so many students struggle to afford higher education, even when enrolled in a relatively inexpensive public institution. We urgently need more and better financing options. And we can’t rely solely on federal and state policymakers to come up with new tools, given the glacial pace of legislating in Washington and the difficulty of making national policy decisions that work effectively in every context.

Which brings us to income-share agreements (ISAs), which have been hailed as a way to “fix American’s broken student loan system” and decried as “Wall Street’s Potentially Predatory Alternative to Student Loans.” The truth? We just don’t know yet.

But there are three early adopters of income-share agreements that have caught our attention:

• Colorado Mountain College (CMC)—a college district with 11 campuses serving about 18,000 students a year—launched Fund Sueños (Dream Fund), designed for in-state students with work authorization who are ineligible for federal aid. It’s intended to be particularly helpful for those with DACA status.
• San Diego Workforce Partnership’s (SDWP) Workforce ISA Fund provides a financing option (where there often is none) for high-demand, high-wage programs at the University of California-San Diego Extension. All four short-term programs at the school are ineligible for federal loans and have completion rates of more than 80 percent. SDWP counsels prospective students on several enrollment and financing options in addition to the ISA options, including community college programs that may offer similar coursework and grant aid.
• The University of Utah’s Invest in U program targets seniors who tend to “stop and start” enrollment to reduce costs and avoid student loans, taking a longer time to graduate. Only about 30 percent of the university’s undergraduates take on loans, compared to 65 percent of students nationally who graduate from public and private nonprofit colleges. Through Invest in U, a student can take out up to two separate ISAs, one for fall/spring and one for summer. In that scenario, the student can pay the loans at the same time (i.e., pay 5.7 percent of salary for 65 months) or consecutively (2.85 percent of salary over 130 months).

Here’s a summary of these programs’ income-share agreement terms:

Recently, Lumina Foundation funded studies of each of these programs to determine their legal, educational, financial, and post-graduation effects. With so many ISA models coming online, why is Lumina interested in these three?

• All are already low-cost programs with good outcomes for graduates. This means the total amount of funding provided through an ISA is modest and less risky for students in the longer term.
• All have student-friendly terms—low income-share rates, reasonable minimum income thresholds, and clear payment caps—as well as other supportive services.
• All included students in their design process.
• All fill a gap that existing public financial aid systems don’t cover. The two public institutions are specifically designing their ISAs as one possible solution for addressing costs beyond tuition.
• All of them have a special focus on adult learners and/or students of color—populations on which Lumina focuses much of its work.
• All three raised philanthropic capital to reduce costs for students and to position the fund for long-term sustainability as graduates pay back into the fund when they enter the workforce. A lot of learning can come from this for the philanthropic community.
• None of the institutions relies on its ISA program to support its own financial health. This eases any urgency to build a profitable ISA program and allows officials to focus on student-friendly design, evaluation, and learning.

We see Colorado Mountain College, San Diego Workforce Partnership, and The University of Utah as important partners in helping us understand how income share agreements actually work before anyone attempts to scale them up. The lessons we learn from these ISA pioneers will help us identify some key questions that, when answered, can help resolve the ISA debate. We welcome ideas on these questions and plan to share what we find.