Let’s Discuss Income Share Programs to Pay for College
There’s a new alternative to the student loan to help pay for college and it’s not a different type of loan. In fact, it’s called Income Share Agreements and they seem to be wrought with confusion. Families are skeptical, because it’s hard to explain how these agreements differ from school loans or if a student would be penalized for a loss of job or income reduction. One school has taken this on as a serious student loan alternative, so let’s take a look at their program.
With everyone talking about the recent rise in student debt and how it’s holding our younger generation back, Purdue University has developed a plan to try to ease the situation. Specifically, the Purdue Research Foundation has developed an Income Share Program it’s calling Back a Boiler. The Program aims to help make school more affordable by offering an alternative to private debt or PLUS Loans and in some cases could reduce the cost of funding an education for the student.
Back a Boiler is new, run by the Purdue Research Foundation, and it’s not clear how many students have attempted to take advantage of it. In short, the program provides students with a “loan alternative” – the opportunity to reduce tuition expense now for a promise to pay a certain percentage of salary in the future. For many people this could be significantly less than what they would pay back in student loans.
Purdue is offering to “reduce” its tuition in return for a percentage of a student’s future income. The website does not get into specifics, and states that rates and terms differ based on each student, but, there is a calculator on the site which will give a student an idea of what the payment plan would be. Most plans are paid off in less than 10 years.
On the surface this does not look much different from a loan – you don’t pay today, but, in the future, you send a check every month to Purdue. Maybe it looks a lot like the income based alternative for federal loans. But there are two big differences:
- This repayment plan is designed so that there is no time when the graduate’s payment is unaffordable, since it will always be a percentage of his or her total pay. It will even decrease if a recent grad’s salary goes down.
- If a graduate’s income rises, their payments back into the plan will rise also – possibly paying back more than was originally borrowed.
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There are some ways in which this program is very different than anything out there right now:
Shorter repayment periods. The program states that most pledges will be fulfilled within 10 years or less.
Students may not pay back the full amount “borrowed.” The program offers that if salary does not increase or decreases, a student need only continue to pay the predetermined percentage (which could even be $0). In some cases, the borrower may never pay the complete amount pledged. (Since this is such a new program, it’s unclear right now if this would be similar to a forgiven student loan, for which the amount forgiven may be considered taxable income in the year it is forgiven.)
Payments are capped. While the program is very generous in suggesting that if salary falls or fails to increase, one will not be burdened with unaffordable payments, what is less obvious is that if income increases, payments will also. Although the most a student can pay is capped, a successful grad could end up paying back much more than the amount borrowed, or than he would have paid with a conventional loan.
GPA requirements. In this Program Purdue is making a loan to the student and taking on the risk that the student may not do well in their career and possibly never pay off the full amount of the loan, let alone any accrued interest. The Foundation reduces their risk by applying a GPA cut-off, meaning that this program will be restricted based on a student’s current success in school.
In many ways this makes complete sense and it the opposite of what happens now with private lenders. Right now, no student needs to go into the local private loan officer and show good grades or explain their major or even what type of job or salary they expect to get upon graduation. Instead, the barrier to entry for student loans is non-existent, there is no “reality check.” Compare this to getting a mortgage or a car loan which no one could get without proving they could pay it back based on income and assets. This alone has put many student loan borrowers in an untenable position of borrowing more than their after-graduation income can cover.
While this might be a way to curb excessive borrowing while reducing the “lenders” risk, it must be made clear that this program will not be available to everyone and that may raise questions as more people become familiar with it. Purdue will offer this program to those most likely to succeed, who therefore, will not only have the best chance to pay back their pledge in full, but, probably pay more.
How long can Purdue continue this experiment? Some of the terms of this program are quite generous: Offering declining or $0 payments if salary decreases or deferment for continued education with graduate school. Purdue is betting on the success of its graduates; the math over the next few years will tell the story.
Will this take money from other programs? While the sticker price of tuition at Purdue University is $23,000, the average student pays much less. On average, students accepted to Purdue pay closer to $15,000 per year, with a good deal of aid from the school.
Contrary to what most people think, most aid does not come from federal grants or scholarships, it comes from the school itself, in the form of merit- or needs-based aid. A good deal of this comes in the form of grants, meaning that it is not expected to be paid back. Would these amounts of aid per student be reduced in order to continue to fund this program?
While this program is new, it’s important to discuss it and determine if it is a possible solution to the growing student loan question. Tell us in the comments section: Do you think this is a viable solution to the problem?