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Can Income Share Agreements Eliminate Student Loan Debt?

Can Income Share Agreements Eliminate Student Loan Debt?
(Arenacreative/Dreamstime)

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Monday, 30 July 2018 11:50 AM Current | Bio | Archive

With college debt in the U.S. topping $1.5 trillion, schools and companies are trying to figure out ways to help students afford college and pay off their loans. While various companies are offering to match employees' student debt contributions, some colleges are considering eliminating loans altogether and instead taking a portion of student salaries to pay back tuition costs upon graduation.

Norwich University is the latest school to offer this type of repayment, known as an income share agreement. The university is starting out with a small portion of students who don't have access to other types of loans and those who are taking more than eight semesters to complete their degrees. Purdue University and around 30 other public and private universities have also implemented this repayment plan as an option for some students, using a third-party company called Vemo Education.

Income share agreements are different from traditional loans because tuition or a portion of tuition is covered for the duration of schooling, and students pay a share of their salaries for a set period of time after graduation, instead of taking out a loan and paying back that amount plus interest. This concept is not new. It was first introduced by Yale University in 1955 and was subsequently discontinued in the 1970s. It has also been used by many technical training programs and coding boot camps, as federal student aid is usually not available for these programs.

How Can Income Share Agreements Help Students?

Income share agreements can potentially take the burden of debt off of the student while going through school, as repayment is based solely on their income upon graduation. This allows students the option of accepting lower-paying jobs and taking the time to find jobs that they really want, since they are not bound to repay their debt beginning in the six months following graduation. New financing options, as alternatives to federal and private student loans, are important because student loan debt is a growing problem in the country. College costs are rising and federal student loan rates have increased, making students second guess whether a degree is worth it.

These provide greater incentive for colleges to help students find jobs that pay well.

If colleges are covering the costs of tuition, they have an incentive to help their students find jobs in order to recoup their investments. And if their students get higher-paying jobs, the colleges will be able to recoup their investments in a shorter period of time. Income share agreements put more responsibility on the school to make sure it's preparing its students for finding a job post-graduation—preferably, a high-paying job.

It's less risky for students who have trouble finding jobs after graduation.

In most income share agreement plans, repayment doesn't start until after the student finds a job. In contrast, federal loan repayment starts six months after graduation and is not dependent on whether the student has found a position. Additionally, unless the student enrolls in an income-based repayment plan for their student loans, the monthly payments are not based on income and could turn out to be more than the recent graduate can afford. Income share agreements can eliminate the worry of having to pay back loans without having a steady income.

What Are Potential Drawbacks to Income Share Agreements?

One of the major criticisms of income share agreements is that potential future employment and salary can determine acceptance to the program, and schools could be seen as discriminating against recipients who choose lower-paying professions. Due to the implementation of the program being so new, there is less regulation for this type of repayment, and these universities and third-party companies are largely shaping the program. Rules may change as more students use this option, but there is no way of knowing the impact income share agreements will have on students and the economy as a whole.

Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.
 

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Income share agreements can potentially take the burden of debt off of the student while going through school, as repayment is based solely on their income upon graduation.
income, share, agreements, student, loan, debt
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2018-50-30
Monday, 30 July 2018 11:50 AM
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