Messiah College is planning to become one of a growing number of institutions offering income sharing agreements as a way for students to help pay for their education.
Although not a common financial mechanism, ISAs have been debated for years as to how effective they may be in alleviating student debt issues. While small in scale, Messiah’s program could provide valuable insight into the viability of ISAs over the next several years.
“It’s not a household name type of program yet, but I really think this has great utility for our students and I think institutions are really going to start thinking long and hard about this type of arrangement,” said David Walker, Messiah’s vice president of finance and planning.
The concept of ISAs go back as far the libertarian economist Milton Friedman, who theorized that students should have the right to essentially sell equity in their future earning potential to outside investors to fund their education.
This is essentially what an ISA is. Instead of receiving a loan with fixed payback terms, the student’s tuition is paid on the condition that they will pay back a certain level of their future income over a certain period of time post-graduation.
This allows financial backers to bet on a student’s future earnings potential as a financial security.
While some ISA programs around the county take in funding from commercial investors, Messiah’s program will only use cash from the university itself.
“It’s us saying to them ‘we believe in you and we want to partner with you on your future success,’” Walker said. “The students we’ve spoken to, they viewed it as Messiah College partnering with them and investing with them.”
The school has enough money to run the ISA program for a year or two right now, Walker said, and it is soliciting donors to build up its funding pool.
“We believe our donor population will really embrace this,” Walker said. “We think it has great fundraising potential.”
Messiah’s ISA program will have two different sets of terms. One is for seniors, many of whom are self-supporting and working their way toward degrees. These seniors would be offered $5,000 in tuition assistance, in exchange for 3 to 3.5 percent of their salary for 4.5 years after graduation.
Repayment to Messiah, for these students, would be capped at the original amount of the ISA, meaning students will not have to pay back more than $5,000.
The second ISA offering is for up to $5,000 per year, starting with freshmen. These students would pay back 3 to 3.5 percent of salary for eight years after graduation, with a cap of 1.7 times the original value.
In all cases, payments would be waived for students making less than $25,000 per year.
One of the major criticisms of ISAs is that they may not solve, and could potentially widen, the social gaps that already exist when it comes to student debt.
Companies that appraise potential ISAs take into account students’ future income potential, with students who are higher risk being offered more stringent repayment terms.
Students who come from low-income families, minorities, and those that major in fields with wider income spreads are thus charged higher rates, exacerbating inequities.
“The students who are the most vulnerable and at the most risk — and whom federal loans exist for because the private market would never take them on — those students are going to be given worse terms and conditions and higher-cost ISAs,” said Jessica Thompson, policy director at the Institute for College Access and Success.
Like many ISA programs around the country, Messiah’s program will use Vemo Education, an online technology platform that issues ISA terms and collects repayment after graduation. However, because the ISA funds are not coming from outside investors, Messiah will have more control over to whom, and at what costs, Vemo writes ISA agreements, Walker said.
This is particularly critical to Messiah, given the school’s emphasis on missionary and faith-based humanitarian aid work. While missionaries trained at Messiah are held in high regard by Christian charities, the field is not particularly lucrative.
The school’s ISA fund expects to lose money on these students, but will make money on students in more lucrative fields, thus creating a self-sustaining model, Walker said.
“We wanted to make this accessible to all students. We don’t want it tightly or strictly defined to certain fields,” Walker said. “Part of this is having the strength of conviction to know that our missionaries may not reach the income level of our engineers or accountants.”
The long-term efficacy of ISAs in reducing student debt levels is unknown. For schools, it offers a way to create a self-sustaining funding model, but this is dependent on students being able to handle ISA repayments on top of any other loans they may have taken.
“It doesn’t erase some of the big questions we have about ISAs and if they’re solving a problem for students, as opposed to solving a problem for schools that are struggling with revenue,” Thompson said.
Nationally, many ISAs are being tacked on by students who have already taken out the maximum amount of federally sponsored loans, Thompson said. While ISAs may give better terms than private-sector loans, they’re still fundamentally a debt obligation.
“Do we really think that particularly low-income or minority students, or students going into low-income fields, should be taking on the maximum federal debt plus another bite out of their income from the ISA? What kind of hole are we digging for them overall?” Thompson asked.