There’s $1.6 trillion in outstanding student loan debt, with no sign that this number will be shrinking anytime soon. Over 40 million Americans are carrying student debt, and nearly one in four borrowers are behind or struggling.
Something, obviously, has to change. Senator Elizabeth Warren and Senator Bernie Sanders are calling for free college and widespread student loan cancellation. Other lawmakers are calling for an expansion of income-driven repayment programs while fixing existing student loan forgiveness programs.
A new idea has started to gain traction. What if we could eliminate student loan debt altogether for future students, without necessarily increasing the cost to taxpayers? Something called “income-share agreements” (ISA’s) could be a solution. A bill allowing the expansion of ISA’s has just been introduced in the Senate.
An income-share agreement is a contract between a student and a pool of investors, whereby the investors would fund all or part of the student’s college education. In exchange, the student would remit a percentage of their income back to the investors for a period of time (typically between 10 and 30 years).
Income-share agreements have many potential benefits. Unlike a student loan – which has a set monthly payment and a principal balance that must be repaid with interest – an income-share agreement is simply an obligation to pay a portion of income over time. That means that if minimal payments are made because the individual has low or no income, that should (in theory) be okay, with no penalties. In addition, because this is not a consumer loan, the agreement should not be reported to credit bureaus, easing the burden on people (since student loans can be a barrier to obtaining a mortgage or other consumer product, particularly if the loan has any negative repayment history).
There are some significant potential downsides, however, as pointed out by consumer advocacy groups. Income-share agreements are new and relatively poorly regulated, with few consumer protections. What happens, for instance, if a person has relatively modest income but also has high expenses due to medical bills or childcare? Would they be obligated to prioritize their income-share payments over other expenses? If so, this could force them to forgo critical health care treatments or prevent them from working if they cannot pay for childcare. Furthermore, investors who do not receive the proper share of the person’s income could seek recourse by suing the person in court under a breach of contract theory, which could lead to wage garnishments and asset seizures. The impacts on people with low income, people with dependents, and people with extenuating circumstances like serious medical problems or unexpected expenses could be disastrous.
The senate bill would provide an income threshold before payments become due under any ISA, would cap payments at 20% of income, and would subject ISA’s to oversight by federal agencies. ISA’s would also be dischargeable in bankruptcy, unlike student loans. But is that enough?
Ultimately, income-share agreements could be a creative solution to the student debt crisis. But given the lack of consumer protections and the power that potential investors could have over students and graduates, we need to be very careful before implementing these programs on a widespread scale.