Purdue Experiments With Income-Contingent Student Loans

HughPickens.com writes: Danielle Douglas-Gabriel writes in the Washington Post that Purdue University is partnering with Vemo Education, a Reston-based financial services firm, to create income-share agreements, or ISAs, that its students can tap to pay for tuition, room and board. In return, students would pay a percentage of their earnings after graduation for a set number of years, replenishing the fund for future investments. Purdue president Mitch Daniels calls the contracts a constructive addition to today's government loan programs and perhaps the only option for students and families who have low credit ratings and extra financial need. "From the student's standpoint, ISAs assure a manageable payback amount, never more than the agreed portion of their incomes. Best of all, they shift the risk of career shortcomings from student to investor: If the graduate earns less than expected, it is the investors who are disappointed; if the student decides to go off to find himself in Nepal instead of working, the loss is entirely on the funding providers, who will presumably price that risk accordingly when offering their terms. This is true "debt-free" college."

However some observers worry that students pursuing profitable degrees in engineering or business would get better repayment terms than those studying to become nurses or teachers. "Income share agreements have the potential to create another option for students looking to pay for college while seeking assurances they will not be overwhelmed by future payments," says Robert Kelchen. "However, given the current generosity of federal income-based repayment programs and the likely hesitation of those who expect six-figure salaries to sign away a percentage of their income for years to come, the market for these programs may be somewhat limited."

Comments

Punishing people who get degrees we need the most

[TFoo]

Want to pursue a STEM or other high-paying degree? No problem, but you have to pay a lot more for your degree.

in other words

[fche]

With investment in other asset classes being unproductive, Purdue turns a portion of its foundation money into a bank to loan to its own customers. It's like the car makers' financing arms, just more speculative contracts.

Re:Nurses or teachers?

[Bengie]

The author doesn't understand that averages are nearly useless for income distributions. You need to use medians.

Re:Nurses or teachers?

[ganjadude]

not to say anything negative about teaching being that a good portion of my friends are teachers, but why should one want/need a masters to tech middle school? curious on if it was even worth it or if a bachelors would have been enough

Re:Punishing people who get degrees we need the mo

[ravenspear]

Private schools want profit first and everything else, like actual education, third.

Nope, what you described are for-profit schools. There are plenty of non-profit private schools that provide a great education and value their standards highly.

Re:How Innovative

[NostalgiaForInfinity]

Two thirds of college students graduate with no debt whatsoever. Only about 11% have debt larger than $36000 (the average cost of a new car).

If you choose to go into debt under these conditions by choosing to take out loans to get an overpriced degree that doesn't lead to a good career, it's your own fault; it's clearly not necessary for succeeding in life.

This is true "debt-free" college."

[Anonymous Coward]

I call BS. This nothing more than owing the Company Store.

Listen, our society, if it weren't for greed, should understand that
an education S/B part of the infrastructure - some states actually
have it in their State's Constitution (but it's rarely honoured).

Some other European countries are starting to see this fact, and
provide for their people accordingly. This is one of the reasons
India is killing the U.S. in STEM - just ask any one of them!

CAP === 'fortify'

ok

[argStyopa]

"... some observers worry that students pursuing profitable degrees in engineering or business would get better repayment terms than those studying to become nurses or teachers..."

And that sounds completely REASONABLE.

TAANSTAFL, people.
I know you really want a giant grant so you can get that PhD in Russian Literature but you know what? To live, you need money. To have money, you need to have a job. Life is work, and work is (usually) shit. If you're staggeringly lucky, you get to do something you love for pay. More often, you rationalize whatever enjoyment you can out of what gig you can get.

But you're simply not entitled to do what you want, and have someone else pay for it. I'm sorry if your parents never taught you that. We can talk all day long about the bullshit costs of colleges, and I'll entirely agree with you. My dad? Full ride as a football player in 1955 to the U of MN, this was noted in the paper as worth $300/year.
I went to the same school in 1986-1990, and my college education cost about $3600-$4500 annually as I recall.
My son going to the same school this year, it's about $25k/year.

Using RoI calculators on the web, my dad's tuition this year would be $2600.
Mine would be $9800.
That's absolute horse shit, and personally I suspect at least part of it has to do with ample grants and easy loans since the mid 1980s. Clearly, it's not going to teachers.

Hard to make it work

[SoftwareArtist]

The only way I could see this working is if it were the only option for financing college. We would have to completely eliminate conventional student loans. Otherwise, the results will be very predictable. People planning on high paying careers in engineering or finance will choose conventional loans, since that's a better deal for them. These agreements will be used mainly by people who don't expect to make much money for a long time. The companies financing them will take that into account, and find that to earn a reasonable payback, they have to set the repayment percentage really high. High enough that most people will end up worse off, not better.

Remember, risk has negative value. You have to pay people to accept risk. Under these deals, the companies take on more risk. They won't do that unless they get something in return, that is, unless their projected profit is greater. So on average, graduates have to end up paying more, not less. And unless you force the wealthier graduates to bear that whole burden, it will end up falling on the poorer graduates.

This sounds like an attempt

[rsilvergun]

to bypass rules and laws about how much interest can be charged for certain types of loans. I can't think of any other reason to do this.

Re:Punishing people who get degrees we need the mo

[ravenspear]

Virtually all respected colleges and universities with any sort of historically recognized quality are non-profit.

For-profit universities (if they can even be called that) are in many cases little more than diploma mills. The primary goal is to move bodies through the system as efficiently as possible and extract the maximum payment, not provide a usable education.

Re:Punishing people who get degrees we need the mo

[ranton]

THIS. Seriously, treating 18+ year olds as children incapable of making their own informed choices is one of the reasons that student loan debt is an enormous problem.

We don't treat them as children incapable of making their own informed choices. If that was the case they couldn't enter into these contracts in the first place.

No one is even asking for that. They merely want laws governing student loans to take the disparity in maturity and available information between an 18 year old and a bank into account.

Re:Punishing people who get degrees we need the mo

[_Sharp'r_]

Unfortunately, the current social sciences at U.S. Universities is more likely to turn out a 26 year-old government social worker who thinks all parents are idiots who need her detailed supervision and spends her free time in "safe spaces" demonstrating for vague left-wing causes in the hopes of finding an enlightened boyfriend who'll stay longer than one night.

If instead, it were to actually "teach people critical thinking, how to argue and write persuasively." and produce "well-rounded individuals who can go on to be successful in a number of fields.", then the ISA market will value that future success and ability to repay in the future appropriately.