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June 14, 2019

USA Today: These colleges let students ditch extra loans. But will students pay more in the long run?

Andrew Hoyler had already given up a lot in his effort to become a pilot. He had secured scholarships, took out federal student loans and worked several jobs, but it still wasn’t enough. But his college, Purdue University, had another option for him.

It would cover his remaining costs, but in exchange he had to give the Indiana university 8% of his post-graduation paycheck for 104 months — almost nine years.

Hoyler graduated in 2017 with more than $100,000 in debt, and he lives at home with his parents. He makes about $3,766 a month before taxes as a first officer, flying American Airlines planes up and down the East Coast. 

His goal right now is paying down his loans, in monthly payments that run about $850. He pays roughly another $300 to Purdue, the designated 8% of his paycheck. He says it’s a manageable amount, which will increase as he earns more. Plus, he views the flat percentage of his income as an “extra layer of security,” in case he finds himself unemployed.

But the arrangement with Purdue, described in the world of college financing as an “income share agreement,” could mean graduates like Hoyler end up paying more than they would if they took out a traditional loan. Their payments and salaries are low now, but they’re likely to increase.

Then there’s the Morehouse graduates: Robert F. Smith paid Morehouse student loans. What about those of us without a billionaire?

To some, the income share agreement is an answer to the nation’s growing student loan debt. Because the university puts forward the money, they argue, it’s in the college’s best interest to make sure the student finds a good job. And, they say, these agreements sidestep a traditional form of debt that may swell with interest if it goes unpaid.

Critics question whether the payment plans are a money-making scheme for colleges and whether they encourage colleges to favor students headed for high-paying careers. Ultimately, critics say, they’re just debt under another name.

For Hoyler, agreeing to share his income with Purdue so far has been worth the risk. He knows the payment will go up as his salary increases, but the lower payment he enjoys now lets him do other things like serve as a volunteer for the local sheriff’s office.

“I am also running for school board, something I would not be able to do had I needed to work a second job just to pay off all the student loan debt,” Hoyler said.

Purdue has so far been the highest-profile university to adopt the income share agreement, but others like the University of Utah are piloting their own programs. They’re also popular among career-training programs outside of colleges that don’t qualify to receive money from the federal government.

The U.S. Department of Education has discussed starting an experimental income share agreement — much to Democrats’ concern. 

Among their fears: These agreements may still prove burdensome to students, and they may be discriminatory against people who don’t pick high-paying fields, according to a letter signed by Sen. Elizabeth Warren of Massachusetts, Rep. Ayanna Pressley of Massachusetts  and Rep. Katie Porter of California.

“An ISA is simply a debt that must be repaid,” they wrote. “It also creates an incentive for funders and private investors to generate as much profit as possible … a dangerous scenario for students.” 

The lawmakers sent a similar letter to colleges implementing these programs as well. 

This alternative way to pay for college comes at a time when public concern over the nation’s roughly $1.6 trillion student loan debt continues to generate rigorous debate.

And solutions would be pricey: Plus, some say Elizabeth Warren’s debt forgiveness plan would benefit the rich most

How it works: Like a loan, with one difference

To the bank account, there might not be much of a difference between traditional loans and special agreements with colleges. Both require monthly payments meant to cover the previous cost of an education. They differ in how long it takes to repay and how they’re marketed to the public. 

The standard federal student loan comes with a term of about 10 years, though borrowers can pay on them longer or shorter by paying more or less than the standard payment.

For most income shares, the borrower doesn’t have a set amount to pay back. Instead, graduates pay a percentage of their paycheck for a set period of time. The length of the agreement and the percentage of a person’s income depends on who is fronting the money. And the amount a borrower pays back may be capped.

Take a $10,000 loan. Paying over a decade with a 7% interest rate, the borrower will shell out about $14,000.

With an income share agreement, students who end up working in a low-paying field could pay less than what they originally borrowed. 

Or they could get a high-paying job and shell out much, much more. Purdue has a cap of two-and-a-half times the original amount borrowed. So our student with the $10,000 loan would hit the cap at $25,000. 

Better than a second loan?

In offering the income-sharing plan, Purdue isn’t trying to compete with federally subsidized student loans, said David Cooper, who oversees Purdue’s program. Many experts in financial aid say it’s hard to beat federal loans for students, which come with low interest rates and built-in protections for borrowers who can’t pay. 

Rather, the goal is to compete with extra loans a student takes out after hitting the $31,000 limit for federal loans. Private loans or government loans to parents of students, known as Parent PLUS loans, have higher interest rates. But students sometimes need them. 

That’s where income share agreements come into play.

At Purdue, the percentage students are required to pay back depends on their field of study and their expected earnings. An English major, for example, would pay 4.5% compared to someone studying Computer Engineering who would only pay back 2.5% of their paycheck. The reasoning goes that a degree in the humanities is associated with lower earnings.

The idea, Cooper said, is that Purdue is taking on the risk. The university makes more money if the students do, so it’s in their best interest to help the student find a high-paying career. If the student earns less, so does the university. 

“It was very meaningful to them that their school had the faith to back them up,” Cooper said. “To really have skin in the game to say, ‘We believe the value received here for your education is worth it so much so we’ll put our own money behind it.’ “

And if a student pays more than they would with a loan? That means, Cooper argued, the student has been successful. 

What about debt forgiveness?: More than 41,000 sought federal student loan forgiveness. The government approved just 206

A manageable payment, but you’d pay more in total

In many cases, graduateslooking to take out a second loan would pay less in the long term if they opted to take private loans over an incoming-sharing plan, according to an analysis by Derek Tharp, a professor of finance at the University of Southern Maine.

Still, the differences paid between private loans and these types of agreements are usually near the $10,000 range. That’s a fair amount of money, but when in factored into a lifetime, it’s less significant. 

“For any student, I don’t think it would be wrong to go one direction or the other,” Tharp added. 

In the University of Utah’s income-sharing program, all students pay 2.85% of their income, but the length of the payment plan varies on how much the student took out and how much money they’re expected to earn in their field. Those predicted to earn less pay longer, so a special education major who takes out $10,000 would be on the hook for about ten-and-a-half years, whereas an electrical engineering major would only have to repay for six-and-a-half years. 

The fear for some is that universities may start to limit who they admit and what areas of study they offer, just to make more money, said Jessica Thompson, a director at the Institute for College Access and Success.   

And, she argued, universities looking to increase their profits may see income share agreements as useful — especially at a time when student enrollment and, consequently, tuition money continue to decline.

“That is a huge conceptual difference that is not in any way, I can imagine, in the interest of student borrowing,” Thompson said.