Income-share agreements - yay or nay?
If you're averse to taking on debt, could ISA be the way forward? Source: Shutterstock

You may have heard about income-share agreements (ISA), but what exactly are they?

In a nutshell, an ISA can be used to fund your university education and serves as an alternative to student loans. With this model, you’ll receive funding from an investor or investors (e.g. from a private company or your university) while studying and will need to pay a percentage of your future income for a fixed period post-graduation.

One of the appeals of an ISA compared to a traditional loan is that the ISA recipient enjoys flexible payment. For instance, the Manhattan Institute (MI) notes that if an ISA recipient’s income drops for whatever reason (e.g. recession or personal circumstance), so does their ISA payment; if the borrower’s income increases, the reverse is true.

With the ISA, investors carry the risk instead of students if they are unable to commit to their monthly payments. MI notes that this is “because high-earning students cross-subsidize the losses that investors suffer from low-earning students”.

In the US, universities such as Purdue University, Messiah College and the University of Utah have ISA programmes for their students.

Speaking to CNBC Make It, Purdue President Mitch Daniels said: “It (ISA) gives them certainty and some protection and safety. They’re not going to have that much money borrowed, piling up, compound interest whether they’re doing well or not.”

Despite some of the potential benefits, in practice, there have been issues in implementing ISA, including in the 70s, where Yale University’s cohort-based ISA programme was considered a failure. Meanwhile, US News and World Report noted that “ISAs are often criticised for being unregulated and untested”.

Regardless, The Heritage Foundation notes that “Purdue University is leading the way on reviving ISAs”, noting that Purdue had included the median starting salaries on their website, thus, providing “transparent information to students”. They added that, “This kind of transparency and quality assurance is severely lacking in today’s higher education system”.

With all that said and done, should private companies or universities abroad consider experimenting with ISA arrangements?

On ABC News, Mike Rafferty argued: “In an Australian context, income sharing would be a way of privatising taxation and giving governments a way to exit higher education funding altogether, in favour of financial institutions, at a cost.”

Rafferty said income sharing can be seen as a form of ownership over graduates and that “lives could be priced like a company’s shares.

“With income sharing, finance stands to make money from and assert further control over our human experience. Their investment is not in the individual student or household, who could fail to turn a profit for them, (although in practice corporations would try to refuse to fund or risk manage those judged likely to fail).

“The profitability comes from aggregating life’s experience and the work effort of millions of individuals and households. In this way too, our lives could also be priced like a company’s shares,” he said, adding that, “Practices like income sharing set up the possibility of an actual human stock exchange to trade these shares.

“Financial institutions are always interested in investing in income streams to diversify their investment portfolio. In so doing they would be able to put a price on something they have usually seen as an inconvenient factor of production – people and their capacity to work.”

Whether ISA agreements are the way forward remains to be seen, but it is clear it needs more refinement to ensure a balance between benefiting students and investors, without exploiting one or the other.

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