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1 1 (July 15, 2019)

handle is hein.crs/govbalp0001 and id is 1 raw text is: Congressional Research Service Informing the legislative debate since 1914 0 July 15, 2019 An Economic Perspective of Income Share Agreements Income Share Agreements (ISAs) have received attention as an alternative to student loans for financing higher education expenses. Purdue University's Back a Boiler program has perhaps received the most attention recently, although the University of Utah and a number of smaller schools-Colorado Mountain College, Messiah College, and Clarkson University-as well as several independent private companies offer such programs. This In Focus provides an overview of ISAs along with a comparison to student loans. Because no federal ISA program currently exists and the majority of student loan debt is associated with the federal student loan program, the overview and comparison primarily focuses on private ISAs and federal student loans but generalizes some parts of the discussion to highlight particular features of each financing approach. To conclude, potential policy issues and questions Congress may consider are presented. Overview of ISAs An ISA is a contract between a student and an investor in which the student receives college funding in exchange for pledging a fraction of the student's future income to the investor for a specified period of time. As an example, a student may receive $20,000 for college in exchange for repaying 5% of the student's income for 10 years upon graduation. Under these terms, the student could end up paying more or less than the student received depending on his or her future earnings. If the student were to earn $50,000 each year for the next 10 years, the student would repay a total of $25,000. Alternatively, if the student were to earn $35,000 per year after graduating, the student would repay a total of $17,500. In either case, the student's repayment burden is proportional to his or her income. From an economic perspective, ISAs are an equity-like source of financing because students are effectively selling a claim to their future earnings in exchange for funding. The comparison that is occasionally made is that of a company selling stock to finance business investment. Equity can be well-suited to finance risky ventures such as startups or higher education because no collateral is required, repayment is dependent on the outcome of the investment, and the equity investors bear the majority of the downside risk for the right to share in a potentially significant return. College can be considered a risky endeavor even though the average return to graduating is high because for any individual student there is the potential of not completing school, earning a lower-than- expected income, or being unemployed at some point. Whether ISAs are perceived by students as an attractive source of financing depends on the uncertainty they face about their future income. For those who face a great deal of uncertainty, ISAs provide protection against the risk of a low-paying job and unemployment since the amount a student repays depends on the income they earn and not on the amount of initial funding they received. In contrast, conventional debt financing generally requires full repayment with interest regardless of income, which places a borrower at risk of becoming overly debt-burdened if their income is too low. Income contingent loans, which are discussed below, address this feature of conventional debt. Alternatively, students who are confident about their future prospects may determine that repaying a fraction of their income is too costly of a commitment. In this case, student loans may be a more attractive option because the amount the student would have to repay is limited to what they borrowed plus interest and fees. The student would be, however, at risk of becoming overly debt-burdened should their income be lower than they expected. The ISA model relies on risk-based underwriting to set specific terms for each student or type of student. This means that students who are perceived to be lower risk and have higher earning potential are offered more favorable terms. Investors may consider a range of student characteristics during the underwriting process, such as a student's major, degree track, year in school, academic record, and alternative sources of financing, among others. Investors may also consider the quality and type of school the student plans to attend-for example, traditional four- year college, two-year technical college, or online college. The individualized financing terms may influence students' educational and career decisions. For example, a student with a passion for art history may decide the financing terms are better if she minors in the subject and majors in engineering, which has higher income prospects on average. As another example, the financing terms may sway a student to pursue a two-year technical degree over a traditional four-year degree given their desired career path. This feature of ISAs is popular among its advocates, because in their view students are being provided transparent market signals about the cost and return to students' education and career decisions. On the other hand, it can be argued that such signals could reduce the number of students who may enter careers that generate social benefits beyond the private returns, or that some students may not be granted financing to pursue a particular college path. Comparison to Student Loans Student loans are debt, while ISAs are a form of equity financing; the distinction can be critical. The structure of a typical loan limits a lender's return to the loan amount and https://crsreports.congressg

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