Marco Rubio has called the higher education system “antiquated and broken in multiple ways,” and to fix it, he proposes a voluntary indentured servitude program.
Instead of a loan that a student pays back with interest, Rubio’s plan touts “income sharing,” where an investor pays for college and then receives a percentage of the student’s income after graduation for a number of years, according to Bloomberg.
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The risk shifts from the student to repay a loan, and the federal government who issues the majority of student loans, to the investor paying education expenses in hopes of a return on investment.
Australia has had a “very successful” income sharing system for higher education since 1989. Oregon has led the way in income sharing agreements, running a state program since 2013, and other states have researched similar programs. The Oregon plan, however, would be run by the state, which does not shift risk away from it.
Rubio’s campaign refers to the income sharing as “student investment plans,” and students would allow for the “innovative” plans from “approved investors” within a “legal, accountable framework.” That’s in addition to improving higher education tax incentives and the FAFSA, and making income-based repayment plans as “the universal repayment method for federal student loans.”
Purdue University is launching an experiment in income sharing to test its feasibility, and it could result in a useful case study.
Income sharing could be beneficial for students in low-paying fields after graduation. Instead of repaying federal loans, their payments would be more manageable. If they found themselves unemployed, a required payment wouldn’t be necessary like a traditional student loan.
Alex Tabarrok, an economist at George Mason University, described income-sharing agreements as “improving idiosyncratic risk sharing.” That is, students with degrees that average better salaries will have better repayment terms than degrees that earn less.
The kink in income sharing plans could be adverse selection. If low-income graduates flock toward income sharing, but high-income graduates stick to federal loans, investors could struggle to earn a profit. Or, if income-based repayment programs gain popularity, low-income graduates could stay with federal loans that they don’t have to repay in full, if that path is considerably cheaper than income sharing.
If a student doesn’t have a strong idea about a future career or fully comprehend the cost of college, a choice of federal loans or income sharing could prompt an analysis of why they enrolled in college.
Rubio’s endorsement of income sharing signals an openness toward non-traditional approaches to higher education. Until the American system tests income sharing more widely to see whether it could succeed, however, it’s unclear how effective it could be in reining in the high costs and debt of a college degree.
