Income Share Agreements

Mitch Daniels, former Governor of Indiana and now President of Purdue University, writes about income share agreements in the Washington Post:

In an ISA, a student borrows nothing but rather has his or her education supported by an investor, in return for a contract to pay a specified percentage of income for a fixed number of years after graduation. Rates and time vary with the discipline of the degree achieved and the amount of tuition assistance the student obtained.

An ISA is dramatically more student-friendly than a loan. All the risk shifts from the student to the investing entity; if a career starts slowly, or not at all, the student’s obligation drops or goes to zero. Think of an ISA as equity instead of debt, or as working one’s way through college — after college.

An excellent point. If you watch Shark Tank the entrepreneurs are always wary about debt because debt puts all the risk on them and requires fixed payments regardless. Yet when it comes to financing the venture of one’s own life suddenly equity becomes akin to slavery and debt bondage becomes freedom! It’s very peculiar.

Another advantage of ISAs is that they provide feedback. Is the university willing to educate you for free in return for a share of future earnings? That’s a good signal!

ISAs have emerged principally in response to the wreckage of the federal student debt system but they also represent an opportunity for higher education to address another legitimate criticism: that it accepts no accountability for its results. As the lead investor of the two funds Purdue has raised to date, our university is expressing confidence that its graduates are ready for the world of work.

Check out Lambda School. “We invest in you. Pay nothing until you get a job making over $50,000.”

At Purdue, the university I lead, hundreds of students have such contracts in place, and other colleges large and small are joining the ISA movement. Beyond traditional higher education, coding academies and other skill-specific schools are making the same offer: Study for free, and pay us back after you get the good job we are confident you’ll land.

Although the very nature of ISAs protects the participant, early adopters such as Purdue have built in safeguards. A user-friendly computer simulator provides quick, transparent comparisons with various public and private loan options. No investee pays anything for the first six months after graduation or until annual income exceeds $20,000. For those graduates who get off to fast career starts, a ceiling of 250 percent of the dollars that purchased their education limits total repayment.

I’ve been writing about income-contingent loans for years. Milton Friedman was an early advocate. It’s good to see forward movement.

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People who major in things that lead to good career outcomes will prefer the current system.

Lamda school is 17% of salary for 2 years. I could pay my student loan back over a much longer period paying far less per month. 17% of salary sounds extremely burdensome to me - $50K per year is nothing having to pay 17% of that for 2 years sounds tough.

Yes, but it's quickly paid off. Humans aren't creatures of pure math. A student who pays off his entire debt in 2 years is going to feel a lot better about it than a student who took 15 years to pay it off, even if the student who did it in 2 years paid a significantly higher amount of principal.

I think its quite burdensome to have to pay that off so quickly. When you start out you are likely faced with a lot of up-front costs: maybe having to move to a new city, buy a car to get to work, etc. If you need to be paying out 17% of your gross salary you're going to feel pinched.

"If you need to be paying out 17% of your gross salary you're going to feel pinched."

It's either nurse the debt for years (maybe decades) or take the hit quickly while your expectations and expenses are still low. It's always a personal decision of course.

A big part of the problem is that most students getting financial aid use substantial portions of that aid for quality of life expenses. Things like a car, a vacation, spring break, partying, etc.
IMHO the federal government has no business in loaning money (or backing such loans) to students. End all student loans; problem solved.

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If all students are better off, this amounts to throwing more money at the problem, while leaving schools unaccountable for outcomes. No thanks.

Also, I suspect Alex is rooting for something like this so as to use it as a teachable moment about marginal tax rates and incentives.

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I'm not so sure. First, there is no suggestion that these loans replace the current system rather than supplement it (as an option). Second, doesn't whether people who major in things that lead to good career outcomes would prefer a traditional student loan over a income sharing one depend on the terms? I'm assuming that in a free market, terms are negotiable. Good students with good prospects should be able to negotiate better terms, thus lowering the participation rate. The income participation could be capped at a certain amount which could easily be compared to an effective interest rate. Also, it strikes me that under the "current system" those students with good career prospects are cross-subsidising those with bad prospects in that lenders don't currently appear to set interest rates on career prospects (although I would suggest there is no good reason why they shouldn't).

It sounds like you're trying to improve the situation for people with good career prospects. Is there any evidence these people are struggling under the current system?

As I see it, the student loan problem has to do with paying too much for degrees of little value. Would this change any of that?

I would like to see the situation improved for people with good career prospects; but, to say "I'm trying to improve" anything it is a bit of an overstatement! My "efforts" are limited to a few blog comments.

I don't think people who are trying hard and who pursue careers with good prospects are hurting that much; but, things can always improve. The main benefit would be reduction of risk. Notably, what might be a good prospective career today might be completely out of date in a decade, etc. It's an interesting topic and fun to think about. For example, why don't we create a private investment fund to invest in good student prospects? Part of the problem (for potential investors) is that the best prospects are already getting scholarships and other financial aid. I think I've finally decided that this gets much too complicated, too fast.

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People in high paying majors will be able to sign contracts promising a smaller fraction of future salary and/or for a shorter time frame. The terms of the contracts for different majors will be revealing for students heading into college. It is possible that some majors will not be offered this contract if there is no conceivable way that any reasonable fraction of their earnings will justify the cost of the education; that too will be revealing to the potential student.

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I would suggest the way to make real money is to largely stay away from coding

I would suggest the way to make real money is to largely stay away from the liberal arts and humanities.

I would suggest the way to make money is to make it, and do a better job than the central bankers.

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Could you define real money? An 80,000/year starting salary for junior developers is a life changing amount of money.

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In theory I don't see a problem with ISAs as long as the terms are reasonable (time-limited, capped, etc.) but the pace of inflation in higher education gives me pause on how this might actually play out in the real world. Without addressing the real issue of cost, it comes dangerously close to liberals, libertarians, and other assorted technocrats once again patting themselves on the back for yet another scheme to overbill the public.

To the extent this not-so-new (seen before in 'equity kickers' for commercial RE financing deals) scheme brings more money into the equation, it exacerbates the higher education tuition/fees inflation crisis.

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'It’s very peculiar.'

Particularly since a generation ago (well, pre-1981 or so), one did not need to go into debt to attend a public university. How times have changed between the boomers being the ones benefitting from such a public system, and what we have now.

Boomers were hit with their children's (and in some cases grandchildren's) high tuition.

Boomers were hit with lower taxes - the loans are still in the name of their children or grandchildren.

That higher education underwent amazing inflation is beyond question, of course.

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If you're one of the lucky ones, yes, your boomer parents paid the bill. Look at who is in debt right now any you can see that's often not the case.

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Gosh, what a deal! Less than 250% total interest? They'll be lining up down the block! Lets see, a 29 yr loan at 5% is 190% of amount financed so gosh, less than twice what a used car or a home costs!!

It doesn't say 250% interest. Furthermore, the web site itself just says it's a $30K cap.

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Australia has funded higher education via income-contingent loans since 1989. Seems to work pretty well here.

Do stop being rational, you're interfering with Americans enjoying themselves with fruitless speculation.

Anyway you may be overlooking an argument I first saw made by ... I forget her name, very tall girl who does economic journalism. She suggested that one reason that people are less anti-government in other developed nations is that US government is unusually incompetent.

McArdle - that's her moniker.

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LMAO!!!

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"Another advantage of ISAs is that they provide feedback."

It would be nice if we had some feedback mechanism - it would get rid of those hate-spreading, ideological majors like gender studies.

I actually wonder what happens to those people after college? I'm quite confident no one hires them for a real job. In my experience, they seem to just vanish after college. I never met anyone who says they got such a degree. Maybe they're flipping burgers? Maybe non-profits? Journalists? Maybe they never graduate? Maybe they just don't admit to getting such a degree?

"I actually wonder what happens to those people after college"

I wonder what happens to those people IN college - as in they don't actually exist outside of conservative editorials. Yeah sure, you can find some Gender Studies programs but the number of people actually majoring in this kind of stuff is a rounding error - it's not the legions which populate the conservative imagination of old grandpas.

"they don't actually exist outside of conservative editorials"

They have a pretty damn big influence for people who don't exist.

I hear their crap everywhere, mostly from leftists themselves. Conservative grandpas seem mostly unaware of their latest stupid ideas.

'I hear their crap everywhere'

About the only place I hear such crap is in this comment section, Admittedly, I don't read the NY, and wonder why anyone else does.

NYT, but that should have been clear enough.

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"I hear their crap everywhere, mostly from leftists themselves."
Nahhh I'm Pretttttty sure you mostly here it from conservatives or maybe the tiny number of people who DO major in this stuff end up having an out-sized influence on discourse but in reality hardly anyone goes for degrees from these kinds of departments.

Let's do an example to make it more clear. How about "cultural appropriation".

Google it. Do ANY of those sources on the first page look conservative to you?

Is it in Slate? Vox? NYT? Are those conservative? Look at Twitter. Look at any comments section.

Do you think I'm only hearing this crap from conservatives? Do you think grandpa even knows what the term means?

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They become bureaucrats.

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Probably fewer than 1% of college students major in “studies” majors.

And that small minority, in conjunction with the Liberal Arts majors, ruin the college experience for everyone. They drive the campus speech control, tribunals and general oppression.

The residential college is an anachronism.

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No, look at this, from the National Center for Education Statistics: https://nces.ed.gov/fastfacts/display.asp?id=37. But note the good news in the last paragraph.

Those figures tell us that a little over one-third of 1 percent of the bachelors degrees in 2016-17 were awarded in "Area, ethnic, cultural, gender, and group studies", a number so tiny that it is indeed the size of rounding error as another commenter said.

If you're including "Liberal arts and sciences, general studies, and humanities", which amount to almost 2.5% of the bachelors degrees, those are not the majors you're looking for. That's a catch-all category for degrees that didn't belong to a specific major or discipline. E.g. highly conservative Thomas Aquinas College has a highly structured curriculum where the students are spending most of their time reading Great Books and do not major in anything -- so their degrees are in "liberal arts". That college is about as far away from gender studies, critical race studies, etc. as you can get.

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I'm not a fan.

First it places the burden for fixing this financial problem 100% on the student and protects the education establishment. I'd rather see education retooled for the 21st Century. Why not look at both ends of the problem?

Second, it smells bad - it makes students like indentured servants to their benefactor for years to come. Is that truly the best we can do?

Why not look (at the same time) at alternative income streams for universities that could reduce the need to charge such high tuition?

I do object to climbing on board something that focuses on students rather than looking creatively at the imbalance between what colleges teach and how they are structured and funded, the skill needs of the economy and what students can actually afford to repay now and in the future.

What the student pays is limited by his/her income. If the school has produced a worthless graduate it will receive little or nothing over the (limited) time of the contract repayment. The student is protected in that he/she is obligated to pay a maximum of a fixed percentage of income above a minimum. The school is fully exposed; it may receive nothing, its downside is 0, its upside is limited by the contract to 3X what was spent on the education. If you want the education establishment to reform, there will need to be incentives. This would be a huge incentive to change by making educations more useful to students and their future employers.

All loans are a contractual obligation of the debtor to the creditor. What would make this indentured servitude? The other options are perpetual servitude to a lender, rather than a time- and value-limited obligation to a school, or government footing a bill that has increased for years far beyond inflation, subsidizing upper middle class university students and employees with taxes from working people.

"Alternative income streams" is a code word for taxes. Students are the chief beneficiaries of the financial returns to receiving a degree, not the society around them. Most non-professional degrees teach few marketable skills of any use to society. Why should society, including those who do not benefit from universities, subsidize the future financial returns of university graduates. ISAs require students to pay for their degrees, but only if those degrees yield the very financial returns that were promised and expected when the students started those studies. What could be more fair?

+1
Lambda School and Purdue only make money when their ISA graduates make money. So they have much more incentive to invest in students in both the learning process and the job search process than do traditional schools that charge money upfront. What better way to align incentives or create a tight feedback loop?

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Make the payments pre-tax dollars and all you've done is basically gotten students to sign up for alumni donations while still matriculating.

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Mr. Daniels writes as a time-share seller. All pros, no cons.

Instead, I expected some words as securitization or institutional investors. The theory behind securitized assets is that the default risk of an individual is mitigated by a large pool of heterogeneous individuals facing heterogeneous circumstances. Then comes the part about ISAs at Purdue, then comes a part about ISAs only for the students that could not get a taxpayer-subsidized federal loan......it looks like only a small fraction of the students would take this alternative and that securitization may not achieve the risk hedging goal if the students fail by X or Y reasons.

So, who's the real customer here? If the contract terms are truly good for students, they're less good investors. Sub-prime securities once again. I'd worry that the business motivation behind all this is just securitization to generate regular fees to the people managing the ISA fund while using some retirement funds or other institutional investors as bagholders.

There's also a curious conflict of interest. The education provider and the fund managers are under the same institutional umbrella. The ISA fund would profit more from a 90% graduation rate instead of settling for 75%. The same institution should give competitive returns to investors while ensuring a high academic standard (filtering low achievement students) There is a strong incentive to ensure students graduate, even cheat in order to ensure future profits.

ISAs may have a merit, but the the current implementation at Purdue seems not to hedge risk (small pool of students), and sets a conflict of interest for university managers.

PS. I'm no expert. It would be great if a securities expert assesses the case.....for free =)

Spot on!

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That may be better for students as well, since the piece of paper seems to provide a substantial (signaling?) premium

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Very good analysis.

But, my kids told me that there is no substitute for wealthy parents.

I myself prefer the time payment plan: lower fees for public colleges paid for with taxes over the parent's and graduate's lifetimes. It also may encourage some kids to go to school, or give parents the confidence to tell their kid they can go to school with minimal aid or a part time job. Oh, the good old days before states started cutting back on higher education.

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Why do you say they would drive for a higher graduation rate? The incentives here are for the investors to look for people or programs that get people working in jobs that can pay the costs of education. If you cheat or have a terrible educational program, the students who graduate won't be able to keep the jobs, and won't pay back the investors.

If you cheat on your engineering exam or get some half assed education and a piece of paper in dentistry or some other real world occupation, you won't be able to work. Already employers look at these programs and try to hire the top 5% knowing that there are lots of dregs at the bottom.

Something like this cannot be the sole source of educational funding for the simple reason that an economic rationale for most of the students can't be made.

Why? Try the shoes of the ISA fund manager: a) you need to report a 30% dropout rate today and quite probably a write-down or b) report a lower dropout rate today and let a future fund manager handle the issue.

This would be less of a problem if the ISA fund were completely independent from the university. Today, it looks like the new ISA fund profits from the university reputation to get money from investors.

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Yes there are incentives for the university. The university has an incentive to produce graduates with marketable skills, who will make enough so that there is a good return on the ISA. But that is also what the student wants. The ISA aligns the goals of the students with the institution.

In contrast, without the ISA the university has no incentive to have students complete their program of study, or to gain marketable skills during that study. The university's only incentive is to get more students to sign up for more and cheaper classes. They do this by making classes bigger, paying professors less, offering programs that are inexpensive to teach (but offer little value), and getting students to stay as long as possible. The university has no incentive to increase the quality of their programs or the efficiency of the system.

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The continuing financialization of America. If GE (and other industrial companies) could become a finance company, why not colleges. What I see here is the opportunity for educating young people about finance and accounting, in particular the ways to disguise or hide income to avoid payment of a debt that is a function (percentage) of income. Why should millionaires and billionaires have all the fun avoiding repayment of debt (and taxes) with creative finance and accounting. Economics is about incentives, and this scheme offers incentives to cheat. The absurdity of this scheme makes it all the more appealing to a certain class of economists.

Every person in the world should be both saver and borrower under the same fair traded system, regardless of amounts. Zuck, get you ass in gear and make Libra work according to abstract tree theory.

Economics stops when the nature of the majority becomes totalitarian, i.e. the inability to believe becomes plural. The word cagist springs to mind, and though I don't disagree with the prospect of inheritance, the ideal of limits becomes boundless.

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Looks like there’s some tremendous race and gender bias reinforcement in this proposal. White man would be able to finance at a lower rate than a woman of color, even given the same major at the same school.

Why?

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Where did that come from? All students in the same major are offered the same terms for the ISA, because they have the same income prospects. Discriminating on the basis of race or sex would be both illegal and deeply contrary to the university's mission. It would also make no economic sense.

"All students in the same major are offered the same terms for the ISA, because they have the same income prospects."

No.

I am a geologist/paleontologist working for a Fortune 500 environmental firm. I have a friend who works for a gold mining company, another who works in a small Midwestern museum. We all have the same degree. Care to wager what the disparity between our incomes is?

Same thing would be true of doctors or lawyers. A general practitioner or pediatrician isn't going to make the same as a brain surgeon, nor is someone doing environmental law going to make the same amount as someone who specializes in corporate mergers.

The idea that folks have the same income prospects simply because they have the same major is contradicted by even a casual assessment of the available data.

Those investing in the ISA (including the university) are investing based on the returns from the average student. Of course there will be variability as to how individual students will use their degree and their future incomes. Nevertheless it is quite practical to predict the income of future graduates based on the income of recent and more established graduates on average.

A student might choose to refuse the ISA and finance using traditional loans if they were certain that they would earn more than the average graduate, but what freshman knows that?

A casual assessment of the available data does not state that all graduates make the same salary (really?), but that same casual assessment will tell you that the average salary of graduates is remarkably consistent. The investor is betting that students will make the average, on average. Given that the investor is contributing to a fund for hundreds or thousands of students, that's a pretty good bet.

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There is nothing wrong with such agreements. It's just that they should be third or fourth tier solutions to our problem.

How should we best advance human capital and progress in our society? (1) heavily subsidized education for top students, (2) a dodgy loan system for all students, (3) a new and dodgy system of income sharing ..

Note: it is especially harsh for boomers who benefitted from (1) to say to younger generations "let them eat (3)!"

#1 still exists. I don't think it's them that people are concerned about.

There's nothing dodgy about loans or income sharing until the government starts putting their thumb on the scale

This page has The Cost of Tuition at UC and CSU Over the Years, Adjusted for Inflation.

I think that post y2k increase is common across the country, and represents a shift from (1).

You said top students. Outside of UCB and UCLA there are no top students. And looking at sticker price tuition masks the reality of course.

Look at the top private schools:

Stanford:

...university will continue to provide free tuition for typical parents with incomes below $125,000...

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(1) already exists and has been in place for decades.

For example, Harvard:

Families with incomes from $65,000 to $150,000 pay between zero and 10 percent of their income [in tuition and fees]

This is standard for top Universities and top Lib
Arts colleges in the US.

The ones with debt are the marginal students who attend bottom tier schools. Top students have little to no debt from undergraduate studies.

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Note to the reader:

To really advance human capital and progress, you probably don't want too narrow a definition of "top."

The old state college system took a pretty broad view, that you wanted to heavily subsidize higher education for the top 30-40% of high school graduates. That's a system that worked, benefited, many of us here. I think Alex benefited similarly, at the University of Toronto.

So why do grumpy boomers turn against the system which did so much to create the wealth and technology of our age?

Are you grumpier than you should be?

No Boomer, your math is still off. Nice shift of the goalposts from “top” to 40% by the way. You’re now talking about students in the 1000-1100 SAT range.

The total Boomer college graduate percentage is about 26%. That includes all private and public universities and colleges. So maybe 15% total were subsidized. Not 40%. You’re not even close.

But regardless this is a cost problem not a revenue problem. Use private schools to remove the issue with differing levels of allotted tax revenue:

Tuition and fees have increased by an inflation adjusted 129%, and that’s overstating inflation (it’s closer to 200%). And this has nothing to do with tax revenue.

Subsidizing demand and weakening the signaling effect just creates an educational arms race and a massive rent seeking opportunity. The ones hurt most are the marginal students who were never cut out for college and never graduate with anything but debt.

I'll give you a rare response to explain why I don't reply to you.

An intelligent reader would have understood "top" to be a soft word that invites introspection about what it does, and should, mean in this context.

It was certainly not intelligent to "assume a value" and argue a response on that basis.

Similarly, an informed reader would know that college enrollment was about 45% in 1960, climbing to 65% in 1998.

https://nces.ed.gov/programs/digest/d99/d99t187.asp

That might imply something interesting about why I choose a *lower* number for high subsidy. But you aren't likely to get there.

So just go away.

You’re shifting the goalposts again. Top doesn’t mean 40%. It certainly doesn’t mean 65% either. We should spend billions to get 900 SAT scorers to attend college and dropout? What? Wasn’t that the purpose of high school?

Enrollment is interesting, and actually starts to get to the crux of the matter. You may have stumbled upon it by accident, but you’re starting to get there.

Yes, college enrollment reached 65% by 1998. But the overall graduate percentage remained stuck at 36%. Get it?

That’s where the problem lies. 29% of the cohort is attending college, racking up debt, and not graduating because they are marginal students (your 1100 SAT students).

Add in another 10% with essentially useless degrees from low tier institutions, and now you understand the debt issue.

Subsidized demand means marginal students attend, rack up debt, and end up in the same occupations they would have been in sans the “college try.”

I’m sure if we just subsidize it more we can fully turn college into high school!

Again, the reason I don't engage with you is that you assume some bull shit and argue with that, not me.

So go away, you can do that alone in a dark room.

You don't need me at all.

The reason you don’t engage is that your priors are built on a foundation of sand, feelings, and a heavy dose of social desirability bias.

When challenged you either shift the goalposts over and over or resort to ad hominem and personal attacks.

Let’s review. You said:

(1) heavily subsidized education for top students

But this already exists, since top students from > 60th percentile household income families pay $0 in tuition or fees. It’s free! All the top private schools charge nothing to families making over $100,000.

You then shifted to the 1100 SAT range for “top students” which then begs the question of why we should subsidize when their graduation rate is incredibly low. What’s the point ?

Then straight to ad hominem. Par for the course I suppose.

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What kind of returns can society expect from subsidizing the higher education of the top 30-40% of high school graduates that we didnt already capture when we subsidized their K-12 education?

That's the interesting question, and economics could take a shot it finding an optimum percentage of a society that should get a free ride to college for maximum ROI. For Max Progress(*)

I think most political fights are sadly free of that pragmatism. It sometimes seems to be free college for all, vs free college for none.

* - Max Headroom's younger brother

We did. It’s called the signaling theory of tertiary education combined with the private vs public return to tertiary education.

Caplan even wrote a book on it.

Gracious writers would say "if you fully subscribe to the signalling view" in full knowledge that not all readers, nor economists, do.

Get back into your dark room.

Anyone else, see also "The Role of Colleges and Universities
in Building Local Human Capital" by Jaison R. Abel and Richard Deitz

Volume 17, Number 6 ✦ www.newyorkfed.org/research/current_issues

I thought I was being gracious.

The four year graduation rate for public tertiary schools is less than 33%. Six year rate is only 57%, with over 80% of the variance explainable by SAT score alone.

The six graduation rate of the cohort you’re targeting for further subsidized tertiary schooling is, generously, less than 1/3.

Regardless, it’s trivially true that signaling dominates. What percentage of the bachelor’s degree wage premium does a third year drop out receive ?

Essentially zero.

Also your link is broken.

It's not a link, it's a very trivial look-up. Something anyone slightly serious about higher ed and wealth creation would have done.

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So the answer is indentured servants...

If you think your earnings will be low, you can anti-select against. If you think your earnings will be high, you will avoid such loans in favor of traditional options.

The borrower will likely have more info and control over salary outcomes than the lender. So the only way lender is making a profit is if he's charging a lot of margin for the non-asymmetric information related risk portion of the deal. And the more margin they charge, the more disincentive for better risks to buy in.

Sounds like this would be hard to do successfully at scale.

Well by your logic I guess we're already indentured servants to the taxman, right?

No, not at all. Indentured servants had a set period or payment then they were free. We can't get free of the taxman. We're all slaves to the taxman.

Ya, when I breeze hundreds of miles on the interstate, that's what I think about. I'm a slave. It's as bad as building the pyramids!

The pyramids were built by paid contractors. In fact, they were a brilliant solution to a serious problem: namely, a lot of people had little to do during much of the year. You could only farm during certain parts of the year in Egypt (based on Nile flooding); the question for the rulers was what to do with the folks the rest of the time. They opted for a solution that encouraged obedience, constantly reminded everyone of the glory of the ruler, and which by all accounts was not resented at all. It was hard work, sure, and probably brutal work, but those were constants until the late 1800s.

The difference between taxes and indentured servitude is that the State doesn't (directly yet) take a role in determining career choices. They don't care if I work at a multinational company making six figures, or at a local non-profit making just above minimum wage. A university with an income-sharing agreement, on the other hand, will DEFINITELY have a say in that.

Revisionist history!

lol, actually I have no idea

"lol, actually I have no idea"

Obviously. The question is the limits of the terrain encompassed by this fence, which I suspect, given your comments, are broad.

ha, such a response, when I was actually being generous to you.

There is a rich history of slavery in ancient Egypt and your synopsis was pretty .. incomplete.

It was definitely a crap response to a reminder that "slavery" might be a tad more unpleasant than tax paying in a modern constitutional democracy!

I am aware of the history of slavery in Egypt. It was a universal practice at the time. The idea that slaves built the pyramids, however, is flagrantly false. (ANY synopsis is going to be incomplete; we're talking about an area where one can make an entire career!)

I note that you've ignored the entire second half of my post. You address what is, to be honest, a trivial aside that I only included because flaunting ignorance annoys me. You asked a question. I have provided an answer. That you ignore it demonstrates to me at least that you are not engaging in this discussion honestly.

The rest was not remotely interesting. Sorry.

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"You asked a question"

BTW, capital A Anonymous is a different person here today

A fair point and I apologize for misattributing the statement in question.

The rest of my assessment stands. Your focus has been on the trivial, not the fundamental. I see no value to further discourse.

Well, note that the implications of this income sharing plan are not something I have chosen to discuss at all on this page.

I'm more interested in the old plan which my (and Alex's and Tyler's) generation benefited from.

I consider income sharing to be much less optimal than that.

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How about giving 18-22 year olds $10K per year to use toward college or whatever? Of course, this goes beyond the MR demographic...

Well, with that idea, why are we worried about student loan debt?

Percent of debt holders with Student loan 93.7
Mean debt (dollars) 32,731
Median debt (dollars) 17,000

Of course, when you multiply $10,000 by the number of those with student loans, you reach very over 500 billion dollars.

And you kill the student loan "crisis" without paying off the loans for the 6% of those with mostly graduate and professional degrees who have debt over $100,000.

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"I’ve been writing about income-contingent loans for years."
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Then you have been doing abstract theory for years.
Bankers do not know time to completion under the current system, the variable is hidden from the banker. Making term loans adds the uncertainty of time.

In abstract tree we dump time, as you have been informed, and we engage in asynchronous, adjustable interest swaps. The banker applies an interest swap from loans to deposits as needed when the loan 'tree' become unbalanced (shows an arbitrage moment). This is how all the fintech banking solutions are evolving into and it allows automatic loan pricing.

Banking manages the Baumol process in economic terms. When you dump time, then debt is another form of equity.

Matt would you mind explaining or perhaps pointing me to a place where I could learn more about what you're talking about here? I vaguely recognize some of the concepts but I'm not really following.

"In abstract tree we dump time, as you have been informed, and we engage in asynchronous, adjustable interest swaps. The banker applies an interest swap from loans to deposits as needed when the loan 'tree' become unbalanced (shows an arbitrage moment). "

Specifically this bit right here.

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So that is it. Drumpf's puppet regime will have ultimately have succeeded in placing America under Russian-stule serfdom. Unless we act now and with the utmost resolution, America will sink into the abyss of a new Dark Age made more sinister, and perhaps more protracted, by the lights of perverted science.

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This will be an interesting experiment, though it seems that there will be a high risk of disincentive effects as people paying X% of their income will work less. Some professional schools like law schools purposefully use future income-based financial aid to disincentivize people from working higher-paying jobs. I imagine most investors would demand a hefty premium to compensate for the disincentive risk, which only increases the disincentive to work, which means that most students will end up far better off financially under the current system (though they’d enjoy more leisure under income-based repayment).

From an abstract economic perspective, you have a very small point. In practice, a graduate who chooses a lower paying job to limit his/her exposure to the ISA contract will lose much more than the ISA (which is taking a fixed fraction) in the short term. In the long term, the graduate takes a huge hit by not maximizing their career opportunities at a young age. So your very small point disappears under a mountain of incentives for the young graduate to maximize their career prospects and earnings.

There's already incentives for students to maximize their career prospects and earnings, and that doesn't stop them from majoring in Art History.
I'm thinking the recent graduate will simply opt to work less overtime and spend more time enjoying their 20s, until the contract expires. Take a year off, travel the world, etc.

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A pure income participation loan does not appear to be very tax friendly under current rules. Unlike a pure loan where it is repaid with interest and principal (where student loan interest is deductible up to $2,500 per year) the share of income paid is not deductible. The income is ordinary to the investor. On the other hand, under current tax rules it does not appear that if the income participation loan is forgiven this would result in income to the (former) student, unlike an ordinary loan.

The problem of deductibility (and the perverse negative incentives these loans provide former students) could possibly be partially addressed by crafting a student loan that combines a low(er) rate of interest (enough to take advantage of current allowable deduction) plus an "equity kicker" if income exceeds a certain threshold. Loans with equity kickers are common in real estate investments.

I think a significant downside is the relatively high cost of administering and monitoring these loans. In addition to the negative incentives to students not to work to hard or earn too much (akin to a marginal tax rate), there is a double incentive to earn money under the radar of both the lenders and the IRS.

There is perhaps an upside to the incentives, provided these are private, non-subsidized loans. It is unlikely that investors would want to finance, say, an art history or gender studies degree. Perhaps a purely market-based approach would provide additional incentives to students to finance educational pursuits that are likely to enable them to repay their loans. Under the current system, the rate of interest on a student loan to fund an art history degree is the same as that to finance a degree in electrical engineering. Nota bene, I have nothing against students wishing to pursue art history or gender studies, so long as they don't expect others to pay for it.

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Another thought:

These loans likely also have some features of TIP's. Not only do wages increase with the career advancement of the former student, wages also tend to increase with general inflation. If the terms of the loan don't provide otherwise (e.g., increase in *real* wages) for the investor, this would provide some form of inflation protection. It would also be a sort of bet on the general economy and the employment rate rather than merely the success of the former student.

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You make some good practical points. The ideal ISA would be underwritten by the university and investors (to retain those incentives) but with collections administered by the IRS, including perhaps making payments to an ISA income deductions under federal law. Britain and Australia have federal ISA systems which I believe have those characteristics. Without federal legislative support, I think Purdue is doing the best that it can, but the program would be improved with that legislative support.

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I can see an ISA working fairly well in certain fields, such as medicine or law. Many people who go into these fields know they want to go into these fields, and are actively pursuing a career in them. Plus, they pay rather well. A 17% hit will be easier to absorb.

However, this isn't most students. Most students don't know what they want to do--they use college as an opportunity to find out. So you're basically asking a large number of students to pay 17% of their future income in order to spent 4-6 years trying to figure out what career they want. Anyone willing to make that investment isn't going to provide a great deal of income down the road.

The other issue is, this doesn't address the fact that we do not, as a society, know why universities exist. They are wallowing behemoths from the Middle Ages which we treat as necessary for society yet can't figure out what to do with. The idea that we should treat education as a primary value--good for its own sake--sounds nice, but fails as soon as the student graduates and starts needing to make a house payment. The idea that education is to make one employable sounds nice--but how many Literature professors do we need? (As an aside, folks on YouTube doing this for free are far better literary critics than most professors I've met in the field.) And why should we subject students to 4-6 years of continuing education in a world where the primary concern isn't obtaining facts (we carry supercomputers in our pockets), but synthesizing them?

The education bubble is a function of the fact that everyone believes that universities are important, but no one really knows why--so they've become relegated to status symbols, subject to whims unrelated to reality. No alternative way to finance university education is going to fix this problem.

You should read Kaplan's "The Failure of Education"; there's a lot of data there to flesh out your opinions here.

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"So you're basically asking a large number of students to pay 17% of their future income in order to spent 4-6 years trying to figure out what career they want. "

Those students could just go the traditional route and get normal student loans.

Just because I'm not in favor of one scheme doesn't mean I'm in favor of the current one. Universities teach specific skills, which are useful for specific types of jobs. If you're not sure what you want to do with your life--if you're not sure you want those specific jobs--you have no business being in a university. No one would go to a police academy without the intent of becoming a police officer, nor would anyone join an apprenticeship program for carpentry unless they wanted to be a carpenter (those who drop out when they realize it's not for them still went in wanting to be one).

The way we treat universities right now is as glorified daycares for young adults, combined with make-work programs for "researchers" (in quotations because far too many have methodologies that would embarrass an undergrad).

"Universities teach specific skills, which are useful for specific types of jobs."

Uhhhh no they don't that's almost the opposite of what universities do.

"-if you're not sure you want those specific jobs--you have no business being in a university."

If you think universities teach job-specific skills you have no business being out of kindergarten you moron.

Do universities teach how to sweat pipes? How to frame a door in a load-bearing wall? How to compact gravel backfill? (Trick question, that.) Not any university I've attended, nor that any of my kin or friends have attended.

That the skills universities teach have wide application in no way means that these are not specific skills. They are broadly useful, but NOT necessary for every job.

Secondly, let's drop the nonsense about universities teaching us to be well-rounded, better citizens, life-long learners, or that they teach critical thinking. That's hype. Someone going into a university as a business major MAY learn these things, but in my experience they generally don't; what they learn are the skills necessary to get a job as a manager, consultant, or other type of businessman.

If you think of skills as specific bodily motions, you've artificially limited the definition either due to a failure of education (which merely proves my previous paragraph), or dishonesty (altering the selection criteria to arrive at a pre-determined result). Intellectual skills are skills.

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Off topic but more interesting: The history of alarmism over genital herpes is a rare piece of quality work at Slate:

https://slate.com/technology/2019/12/genital-herpes-stigma-history-explained.html

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Does the income investor possess or gain the right to direct the needy student into a preferred course of study?

Are certain majors and courses for ISA-sponsored study categorically "off-limits"?

What if the student decides to change majors prior to degree completion? --or to just drop out?

And could the investors charge different rates based on high-school GPAs, test-scores and other student characteristics that would help predict eventual investment return rates? And what if some of these high-rates ended up applying to students in various protected groups?

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"Does the income investor possess or gain the right to direct the needy student into a preferred course of study?"

They're going to spend tends of thousands of dollars on an investment. Even if the law says they can't, the reality will be that the investors will find ways to have a say in it.

What worries me more is what happens after graduation. How much of a say will they have in the student's career after graduation? How long before we see schools sue graduates for making what the school considers an ill-advised career change? After all, if I go from a six-figure legal partnership to working at a startup for $60,000/year, that 17% is going to be a lot less. And that's not going to make the investors happy.

"After all, if I go from a six-figure legal partnership to working at a startup for $60,000/year, that 17% is going to be a lot less. And that's not going to make the investors happy."

Well sure. Just like it wouldn't make this hypothetical students Credit card companies happy either. Nor her parents. But currently neither the credit card companies nor parents have final say.

First, parents most certainly DO have their say in their children's careers. It's not official and the child can oppose them, but it exists. It's been the subject of discussion since at least the time of Augusts.

Second, credit card companies don't tie payment of the loan to the income. The payment is a set amount. That's significantly different. The credit card company cares only about whether I make the payments or not; how I do so is MY problem. The university, however, most certainly WOULD care about my income, because under this scheme my income directly affects their income.

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Yeah, it probably won't be long before investors require students to take the highest paying job offered. Which will then lead to mandatory applications to certain companies, just to make sure the student applies across a wide range of companies. I can see this working as like ROTC - we pay for your college, you owe us 4 years of your life, but that's about it.

It wouldn't be that blunt. A lot of students keep in touch with their old classmates and old professors. And since professors are in a position of authority and knowledge about the field you're going into, their opinions hold a lot of weight. A few gentle nudges can have a profound affect, especially during the years when the school controls the narrative.

There's also the fact that it's HIGHLY unlikely that this will be a flat 17% rate. Maybe a year, maybe two, after this scheme is instituted politicians will start using reductions in rates to incentivize certain behaviors/careers. We see this with student loan forgiveness and with income tax; it's irrational to assume that the same won't happen here. Going from 17% to 10% to work in an environmental field instead of for a gold mining company would be a pretty big draw (especially since you're almost guaranteed a promotion when you do so in this line of work). A reduced sentence--I mean, period of repayment--for working in areas your local senator wants to curry favor with vs. a longer repayment period if you work in less-politically-favorable areas is also a possibility.

Really the only limits are the creativity of the people using this as a means to manipulate people. See the income tax system in the USA for how THAT can go.

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The investor interferes with the choice of major by the terms that are offered up front. A chemical engineer will find themselves paying a smaller fraction of their income for fewer years than will the English major. The Early Childhoood Education graduate may find herself with no ISA on offer, as there is no reasonable contract that could be offered that would pay for her education. So the investor does influence the choice of major, but only by providing cost/benefit transparency for the prospective student up front, something which guidance counselors, parents, universities, and student loan peddlers all fail to do now.

Will this discourage Arts majors relative to STEM majors? Yes, but better to discourage them up front than to find them 5 years later protesting on Wall Street while unemployed because they have no prospect of paying off the loans for their ruinously expensive degree in Fine Arts criticism.

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This have all the problems of income tax, in the issue of incentives.

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A home improvement company around here does something similar. If you are selling your house, they will modernize it to what today's buyers are looking for. You don't pay them until after the house sells.

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An ISA is dramatically more student-friendly than a loan. All the risk shifts from the student to the investing entity;

Excuse me, but did Alex really quote this claim approvingly? I think he let ideology outrun rationality here.

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I would agree *if* loans weren't so heavily subsidized by the state. However, most student loans today are heavily subsidized, so the good parts about ISAs (e.g. feedback on the quality of a major won't really have any effect.

It's one thing if a private entity has to wager their own money on funding a bunch of humanities majors. But it's entirely different if the state wagers other people's money.

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Mitch Daniels is the Republican who I most deeply wish had gone on to be President. He is a practical problem solver much more than an ideologue. His stands on freedom of speech on campus and his pursuit of ISAs are examples of where the Republican party should have been headed rather than down the Tea Party and Trumpian cul-de-sacs. He and his family decided that they didn't want to face the demands of running for President, which I respect, and he may not have been able to attract sufficient support, but when I look at what has happened to the party since he left politics to run Purdue, I cringe. What has resulted is not just bad for the Republicans, but bad for the country. When the Mitch Daniels of the right and left start getting elected again is when our politics start to heal.

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Seem to me there might be a bit of an adverse selection problem. Students with poor career options will tend to go for ISAs at disproportionate rate, resulting in longer contract terms at higher percentages. Which will lead increasingly to students with better career options preferring the current student loan system. I'm not sure if the two systems can co-exist.

I presume over time the investors will segregate the ISA's into groups of students with similar economic prospects. So, students with good prospects pay lower rates than students with poor prospect. This is similar to how our credit markets currently work. Creditors charge people based upon their credit score.

So, yes, it wouldn't work if you had precisely one category. However, it will work if there is some kind of built in product differentiation.

Yes, but students generally know more about their prospects than investors do. And to a large extent, the amount of money you make is a matter of personal choice - a student who opts for an ISA could choose a lower paying job at the start of their career on purpose, maybe because they want to work less and enjoy their 20s more. Or because they want to get in on a startup or something. The student may have private knowledge of his plan to spend the first three years after college in the Peace Corps, which the investor does not.

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"I presume over time the investors will segregate the ISA's into groups of students with similar economic prospects."

I can't see any way that would not generate a political backlash and government intervention to ban such discrimination by major. We live in an era where U.S. government entities are increasingly interventionist (minimum wages, rent-control, re-classifying contract-workers as employees) -- I can't see an actuarially-sound ISA system being allowed to stand for long.

At the very least this would require a massive overhaul of the degree system. Two people with geology degrees can have incomes that differ by an order of magnitude or more, and that's not unique. The degree itself does not provide adequate information on economic prospects.

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If you were to segregate 18-year-old freshmen by their economic prospects, the first thing that you would choose would be their choice of major. Yes, somebody whose Dad owns a big business or has a lot of connections might be fated to do better, but he doesn't need an ISA in any case. The investor (and the university) has no way of differentiating students as freshmen in terms of their economic prospects as a graduate. The outcomes will be widely divergent for those 18-year-olds, but the averages will be stable. If you sign enough ISA contracts, you'll find yourself dealing with the average student, on average. It's no different than buying a bundle of mortgages. Sure, some will default, but the averages are pretty stable, as long as the procedures for choosing the debtors and issuing the mortgages were sound and consistent. Variability of outcome will cancel out for the investor as long as the pool is large enough for the distribution to revert to the mean. I don't think it is possible or a productive use of time to try to predict a graduate's future prospects -- there are no good correlations between measurable personal characteristics and future outcomes. No university would allow a discriminatory system in any case; I'm also fairly sure that to discriminate on the basis of anything like sex or race would be illegal.

But the point is that adverse selection creates a sort of valve/ratchet effect, so "averages" becomes a moving and increasingly meaningless concept. It's happened with obamacare, and that's for something with no clear substitutes and much less room for choice than what one does with their early 20s.

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What about student drop-outs? Or students who are unable to find employment after graduation from perusing a degree with minimal opportunity? If this agreement is set for a number of years, the chances of full repayment in many situations is nearly impossible. If the entire student loan system was to ever switch over, would we be asking for a market crash?

The drop-out is held to the same contract. If they make a salary above the minimum, they must pay the agreed fraction to the ISA, degree or not. Presumably, more non-graduates will fail to reach the minimum, or at least fail to repay what was invested. When pricing the ISA, you factor in the likelihood that a fraction of the students will drop out. This is part of where the feedback to the institution comes in. Universities with high drop-out rates will have expensive ISAs. It will behoove them to accept only those students capable of graduating, then doing their best to make sure they do graduate. Currently the only incentive for universities is to let in as many people as possible as long as they can pay, regardless of whether they possess the background or ability to finish. Today's Universities don't care if you drop out; they get paid either way. If Universities are being paid with ISAs their incentives change.

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Doesn't it have all the classical problems of sharecropping? The 'education' is a bi-lateral public good in which both will under-invest (absent other incentive/monitoring structures)

As an aside, both it and income-contigent loans were floated in Australia in the early 1980s as a means of funding higher ed. Australia went with income contingent loans, but applied very indirectly in relation to course costs: expensive but socially highly regarded courses like Nursing are subsidised; cheap by less well regarded courses (law, in particular) are effectively taxed

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What’s the difference between a school sponsored ISA and fully funded public education? Isn’t paying for tuition via taxes on working people pretty much the same as “financing your education now by working later”? Sometimes it seems like we purposefully restate the obvious values of some socialist politicians in individualistic terms because we’ve be so programmed against public finance we can’t recognize a case for it even when we reason it out ourselves...

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What’s the difference between a school sponsored ISA and fully funded public education? Isn’t paying for tuition via taxes on working people pretty much the same as “financing your education now by working later”? Sometimes it seems like we purposefully restate the obvious values of some socialist politicians in individualistic terms because we’ve be so programmed against public finance we can’t recognize a case for it even when we reason it out ourselves...

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This sounds great. Perhaps we should mitigate the risk of individual ISA's by averaging it over populations.

May some sort of progressive income tax that funds higher learning from the income windfalls from education. Run by the government that then funds the public good. (You know, like it used to)

By golly gosh, it might just work, and cut all of that red tape and administrative doublework involved in corporatised life.

The most terrifying words in the English language are: I'm from Finance, and I'm here to Help"

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Yeah we do this in Australia, it was initially called Higher Education Contribution Scheme (HECS). I think it is now Higher Education Loan Programme.

The Federal Government pays the uni for the student to attend (usually in a broad band - arts courses get a smaller level of subsidy than science/engineering whilst medicine is a higher level etc). Then the Government assigns 50% of the course fee to the student as debt that is paid back via the tax system. Most people I went to uni with 10 years ago finished with $20,000-30,000 debt AUD when I finished 10 years ago.

If you earn below $45,881 you repay nothing. Above that you start paying 1% of your gross income and it scales progressively to 10% at $134,573 gross income. Usually the debt is indexed to the rate of inflation so it maintains its real value.

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