For today's young people, a college degree is a must have, with the bachelor's degree replacing the high school diploma as the minimum education companies are willing to accept. In fact, a recent study showed that an increasing number of businesses are upcredentialing, requiring a college degree even when individuals could learn the skills necessary for open positions on the job. But obtaining higher education doesn't necessarily have to mean mountains of debt. According to Frank Chaparro of Business Insider, income-share agreements (ISAs) soon might put college within reach for thousands of people who otherwise wouldn't be able to go.
How income-share agreements work
The individual terms of an income-share agreement will depend on the institution you're working with. But the general concept is that, when you enter an ISA, a business or other organization pays your tuition. In return, you agree to give that business or organization some of the income you earn once you start working after college. The number of years you have to surrender a portion of your income is set, and usually, the agreement is over in a decade or less. That's roughly the same repayment schedule as federal student loans are supposed to have (actual repayment time for a bachelor's degree is 21 years).
The big potential ISAs hold
Charles Trafton, the head of Massachusetts investment firm FlowPoint Capital, told Business Insider that the market for ISAs, which currently is at $20 million, could reach $1 billion in just 5 years. That's largely because student loan debt is increasing faster than wage growth, with Chaparro reporting that a typical bachelor's degree student's debt load will exceed their annual wages by 2023. Because ISAs are income based, they theoretically are always affordable to those who enter them. They're also beneficial in that, unlike traditional loans, they don't connect at all to factors like parental incomes, meaning that it's easier for young people to break the cycle of debt their families might be stuck in. And with repayment ending faster, individuals might struggle less to save, invest or enjoy a higher standard of living.
But ISAs have problems, too
From the investor's standpoint, organizations and businesses that provide money for students' tuition don't have a guarantee that the individuals whose education they pay for will get hired, let alone that they'll obtain jobs with above-average wages. Data from the U.S. Bureau of Labor Statistics indicates that, as of March 2017, individuals 25 to 34 years old had the highest rate of unemployment at 4.5 percent. By comparison, individuals 35 to 44 years have an unemployment rate of 3.9 percent, individuals 45 to 54 are unemployed at a rate of 3.2 percent and those 55 and over have an unemployment rate of 3.4 percent. So investors who provide ISA funds are taking real risks with their money, and as with any other investment, the returns can vary considerably.
When ISAs are worth it
If you enter an ISA and happen to land a job with great wages, you might end up paying out more overall to the investor than if you had just opted for a loan. To really have an ISA be a good deal all around for both you and the investor, you have to hit a sweet spot where wages are high enough to offer a good return but not so high that the cost of the ISA outweighs other funding options. That's tricky because most people are going to want to take the highest-paying position they can find when they are starting out, as opting for a lower-paying position can influence how quickly your career advances and what you earn once the ISA is complete. In this regard, Victoria Simons and Anna Helhoski of Nerdwallet assert that, based on a Nerdwallet ISA study, ISAs generally are suitable and beat out Parent PLUS, private and private refinanced loans if the amount you pay from your income is between 3 and 5 percent. Individuals with low income projections might have a harder time getting those terms, however.
ISAs still don't address the factors causing education inflation in the first place. But they are another option tomorrow's innovators can use to get educated and get hired. Depending on your circumstances, you might find that they are your key to an outstanding career. Do the math carefully to see if one works for you, and keep an eye on state legislation that might provide paid tuition to students, too.