Purdue University is launching an alternative for student loans as an experimental program that could change the student loan industry.
The “Back a Boiler” program will start next month that lets students repay debt “based on a fixed rate linked to their expected income” rather than a loan amount plus interest, according to The Washington Post.
The arrangement, known as an income-share agreement, could save students thousands of dollars compared to a traditional loan, depending on their earnings after graduation.
“Purdue is the first American university to experiment with ISAs in more than 40 years, and if successful, could mainstream a novel alternative to private student loans,” Danielle Douglas-Gabriel wrote for The Post.
Oregon explored an ISA option run through the state, but poor design led to its demise before it was attempted.
The benefits to an ISA, from a public policy perspective, is that it shifts risk from the federal government to the student and the investor. Depending on the student’s abilities, an investor earns a profit or loss. The idea is that investors will make multiple ISAs with students and spread the risk among large pools of students, similar to insurance companies.
Essentially, an ISA isn’t a debt arrangement so much as an investment that promises a share of a student’s future earnings. A nursing student who uses an ISA instead of a traditional student loan, for example, would pay less in an ISA than an engineering student would, given the disparity in starting salaries for those jobs. Both could benefit from the arrangement, however. An engineer, with higher expected earnings, might pay into an ISA for a shorter length of time, or pay a lower percent of their earnings.
Policy wonks have floated the idea of ISAs as a way to lessen the amount of student debt American graduates and dropouts hold. Marco Rubio, in his higher education platform when running for the Republican presidential nomination, included ISAs. The Republican debates, however, rarely discussed higher education, and Rubio didn’t expand on his vision.
The Purdue program runs through its research foundation. Earnings through the program will be rolled over to fund the program. Repayments rates vary by major and course load, and Purdue created a comparison tool for students to use.
ISAs have been implemented in “a significant and growing number of countries” since the late 1980s, and Australia has widely expanded its use.
If Purdue succeeds in its experiment, legal issues will need sorted out before ISAs can expand. It’s uncharted territory for student financing, but the model could succeed if it gains traction and has enough flexibility to save students money and turn a profit for investors.
