The concern over the rising costs of higher education continues to be a center point of political and social economical discussion all around the world.
With many young adults believing traditional university is the only way to build a stable career and promising future, many feel as if they have no choice but to take out student loans to get ahead.
But the question remains, how much value does higher education actually provide? And more importantly, is it worth the cost.
That’s the current amount of student loan debt that Americans owe collectively, which according to some estimates is actually higher than the total amount of credit card debt held by American consumers.
Of course, the rising costs of higher education don’t just affect those in the United States, “British college graduates, for example, are estimated to have an average loan debt of $55,000, compared with an average of $20,000 five years earlier.”
Despite seeing incredible growth in educational infrastructure, the lack of state funding in India for higher education has led to the rise in private higher education which comes with a significantly hire price tag.
Cost of higher education aside, educational institutions around the globe struggle to keep up with rapid transformation of how we work, learn, and utilize new tech.
Of course, this isn’t to say going to University or taking out student loans is not the right course of action for many. In fact, the data shows that for the vast majority of college graduates, going to college does in fact put you ahead. The Cost of Not Going to College | AIER
But given the costs of higher education continues to increase and put an immense amount of financial strain on young adults all around the world, it’s time to rethink how we fund education and the build the future of work.
A New Alternative To Education Funding -Income Share Agreements
Over the last several years, there has an uptick in interest in exploring new ways to finance education that don’t involve traditional student loan debt.
Many colleges, universities, as well as specialized education programs such as coding boot camps for example, are experimenting with income-share agreements, otherwise known as ISA’s.
At Pesto, we’re a huge fan of the potential of ISA’s and what it means for the future of education, which is why we use the ISA model to provide opportunities for our students in India who otherwise would not be able to participate in our 12 week training for software engineers.
Given ISA’s are relatively new and there are a lot of misunderstandings, it is my hope this guide gives you a better insight into the benefits and challenges of using ISA’s to fund the future of higher education and how we work.
The Basics — What Exactly is An ISA?
At its most basic level, an ISA or Income Share Agreement, is a contract between a student and educational entity, such as a university or software engineering bootcamp.
The school or educational program, provides a service (such as classes, training, and course work), in exchange for a defined amount of that student’s income upon completion of the program.
For example, a university may offer access to four years of it’s undergraduate program, in exchange for 3% of the student’s income for 5-10 years.
Typically Income Share Agreements, only take affect if the borrower is able to secure a job opportunity upon graduation that pays a minimum salary amount. Most ISA’s have a max cap limit in which the borrower must pay back.
One of the major challenges of the current higher education system is that many graduates are coming out of school in signifiant debt but without a career that provides strong financial stability.
Going into student debt only to work at an entry level job for the first several years after graduation can put graduates into a difficult spot financially.
While going to university used to all but guarantee a stable job and income, today’s competitive work environment is making higher education more of minimum bar of entry.
That isn’t to say you must go to college to build a thriving career, however many young adults see going down the traditional path of education as their only option moving forward.
Income Share Agreements in essence can lessen the risk of the borrowers investment.
If upon graduating or completing a program, they do not make a certain amount of money, they typically do not have to pay a portion of their income.
On the other hand, if they graduate and begin a career with a relatively high salary, the Income Share Agreement lender is able to make a profitable return on investment.
For those who have never heard of ISA’s the thought of anyone willing giving up a portion of their income can certainly seem daunting. However for the right individual it can open doors that otherwise might be locked.
Not every individual who desires to further their education or career has the ability to take out loans to fund their education, furthermore, many don’t want to risk the chance of not being able to pay their student loans after graduation.
Theoretically, income share agreements provide a “win-win” situation for both institution providing the service or education, and the borrower.
Let’s take a look at some of the major benefits of ISA’s.
Major Benefits of the ISA
While I’ll be exploring some of the areas of improvement that the ISA should focus on, there are some incredibly clear benefits that make the ISA model enticing for both the lender and borrower.
Capped Payment Amount
For most income sharing agreements, the amount in which the borrower pays back is capped at a certain agreed upon amount.
You may agree to give 5% of your salary for 5 years in exchange for your education, but if you reach the cap before hand your income agreement then ends.
For example, if you join a university that caps your payment at 25,000, you could very feasibly have a six figure a year job and reach the cap in just five to six years.
Compared to traditional student loans that incur interest income share agreements will not grow as you pay your ‘debt’ down. Your defined upon agreement will remain the same throughout the course of your ISA.
Earning more will increase your payment, but your ISA will be paid off sooner.
No Up Front Cost
In most ISA arrangements there is no up front cost required for the educational service rendered, minus the occasional small deposit.
Unlike the current university model which does not guarantee any specified outcome upon graduation, the no up front cost model places a large amount of responsibility on the institution to deliver their promised result.
Those who use an ISA business model, NEED their students to succeed in order to benefit as a business.
Overpromising or not delivering quality education would ultimately only hurt their ability to grow as a business which encourages innovation and high quality customer care.
Additionally, students who choose an ISA model to fund their learning ultimately lose nothing but time if things do not go as planned. They can walk away with a learning experience sans a large amount of debt.
Given in the United States you can’t even declare your student loans through bankruptcy, going to college for two years and deciding it wasn’t for you is incredibly costly.
Challenges of The ISA
Of course, despite its promise, ISA’s are not perfect.
For one, it currently lacks the regulatory structure that traditional federal loans provide in most countries. In some instances, lenders are using smoke and mirrors to trick students into a clearly less than satisfactory conditions.
That said, for the right person, income share agreements can be a welcome alternative to help transition careers, find new work, and learn marketable and valuable skills in today’s economy.
Again despite the promise of ISA’s (we’re fans of them ourselves at Pesto) the reality is there needs to be more regulation and more clear terms.
Given individuals are legally giving up part of their income, it’s crucial that educational companies using ISA’s be transparent and upfront about what the agreement entails.
Like other regulations in the finance industry, proponents of ISA’s should call for legitimate regulation so that borrows can make an informed decision based on their specific needs.
The goal of an ISA is to provide individuals the opportunity to invest in their education in a different way than that is currently offered which is driven by accountability.