Your current web browser is outdated. For best viewing experience, please consider upgrading to the latest version.

Contact

Send a question or comment using the form below. This message may be routed through support staff.

Email Article

ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed

Manhattan Institute

search
Close Nav

How a New Financing Model Could Fix America’s Broken Student Loan System

commentary

How a New Financing Model Could Fix America’s Broken Student Loan System

Yahoo Finance March 24, 2019
EducationHigher Ed

Yahoo Finance reporter Brian Cheung contributed data to this article.

News reports of jaw-dropping scandals involving corruption and fraud in the admissions process of several elite schools are coming at a bad time for the higher education community. Academia was already playing defense in Washington against perceptions of favoritism in admissions practices and intolerance for diverse political views."

But perhaps most damaging has been widespread public concern over high college costs and the $1.4 trillion in taxpayer-backed debt students have racked up to pay for them.

Proposals have already been circulating Congress to tighten the student loan program and impose more accountability on colleges for poor student outcomes. And just last week, the Trump administration's proposed new caps on student loans. Higher education’s value is being challenged as never before: Are colleges singularly focused on providing students with a good quality education, or is that secondary to maximizing tuition revenue and building networks of elite donors? We tend to think the former and that the vast majority of colleges put the interests of their students first." Proposals have already been circulating Congress to tighten the student loan program and impose more accountability on colleges for poor student outcomes. And just last week, the Trump administration proposed new caps on student loans. Higher education’s value is being challenged as never before: Are colleges singularly focused on providing students with a good quality education, or is that secondary to maximizing tuition revenue and building networks of elite donors? We tend to think the former and that the vast majority of colleges put the interests of their students first.

An experimental new financing model

However, they need to acknowledge the status quo isn’t working. Instead of digging in and opposing such efforts, higher education should work collaboratively with Congress to fix our broken system of higher education finance. There are two core problems with that system: 1) it relies primarily on debt to finance college even though it is impossible to know the eventual repayment capacity of a young person just entering school; and 2) it creates misaligned economic incentives by placing all the financial risks on students, and ultimately taxpayers if the student defaults, while loan proceeds go to higher education institutions, who suffer no financial consequences if their students fail.

Fortunately, some innovative colleges, in partnership with private investors and a small number of philanthropies, are experimenting with a new financing model called “income share agreements” or “ISAs” which address these two core issues. With an ISA, instead of assuming a fixed debt obligation, students simply agree to pay an affordable percentage of their future income over a set time period, subject to an overall cap. High earners will have larger payments than low earners, but all will have an affordable payment, based on what they will actually be making. Importantly, when the college is providing some or all of the funding for the ISA, its return will be aligned with its students’ post-college earnings, giving it economic incentives to make sure its students both graduate and find jobs. The college is, literally, invested in its students’ success.

ISAs should not be confused with current income-based repayment plans or IBRs offered by the government, which retain students’ debt obligations and can actually lead to increased debt for low earners when their income cannot support interest due on their loans. With ISAs, there is no principal or interest. Thus, they are much better suited for low income students as their financial obligations never exceed their ability to pay

This piece originally appeared at Yahoo Finance

______________________

Sheila Bair the former president of Washington College and former chair of the U.S. Federal Deposit Insurance Corporation. Preston Cooper of the American Enterprise Institute also contributed. This piece is based on a new Manhattan Institute report, The Future of Income-Share Agreements.

Photo by Spencer Platt / Getty Images

Saved!
Close