Student loan debt represents the second-largest category of household debt in the United States, accounting for over $1.5 trillion in 2020. And while we hear a lot about student loan debt relief from political leaders, there isn’t much variety in their proposed solutions. For example, plans proposed by Senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) have focused on debt forgiveness, while the new Biden administration and former Trump administration both extended student loan forbearance periods.
However, several colleges and universities are beginning to embrace a less-traditional method of addressing student loan debt: income share agreement programs. Under an income share agreement (ISA), the amount due each month for a student loan borrower is dependent on their earnings. In essence, borrowers pay back only what they can afford based on their income.
Beth Akers, a former senior fellow at the Manhattan Institute and coauthor of Game of Loans: The Rhetoric and Reality of Student Debt, wrote a report for the American Enterprise Institute encouraging the implementation of ISAs for federal student loans. Akers states that the current system for loan repayment is ineffective because “it has become a cobbled-together safety net of different programs with different terms and rules for eligibility.”
As a result, she says, many student borrowers are forced to default on their loans and face serious financial consequences. Akers contends that one solution to this problem is to encourage institutions of higher education to replace the complicated federal lending program with a single government-sponsored ISA program. The terms of the ISA contract would be determined by the student’s undergraduate major and their projected post-graduation salary.
Three benefits of income share agreements
According to Akers, there are several benefits to students when colleges and universities adopt ISAs:
- Under an ISA, the amount a borrower is required to pay back each month is dependent upon how much they are earning. Therefore, a student who doesn’t earn a higher salary after graduation, and thus doesn’t experience a large return on their college investment, won’t have to pay back as much money as their higher-earning peers.
- ISAs eliminate the need for a third-party service to facilitate the distribution of student loans. Akers advocates for the IRS to fill this role since they already manage income withholding for taxes. She believes that this will lower overall costs for taxpayers and ease the Department of Education’s burden of managing student loan repayment. Under the current federal student loan system, borrowers must actively manage their own repayment, often by engaging in frequent communication with third-party loan servicers. Allowing the IRS to withhold income based on the terms of an ISA contract would ease this burden on borrowers, too.
- Under an ISA, the amount that a borrower repays may be greater than, less than, or equal to the principal amount which was borrowed from the lender. This outcome is dependent on their post-graduation income, so in order to recoup their costs, lenders and colleges are incentivized to ensure the financial success of their graduates.
The future of income share agreements
As Akers mentions in her report, the student loan crisis has become a prominent subject of discussion among higher education policymakers. In particular, President Biden’s education policy priorities have garnered significant attention since this AEI report was released. In early January, he responded to growing concerns about student loan debt during the COVID-19 pandemic by reiterating his support for federal student loan forgiveness.
However, Akers argues that such policies fail to adequately benefit those who are in dire need of the assistance. Debt forgiveness, she claims, “deliver[s] the biggest benefits to those who need it least.”
As Akers says in Game of Loans, borrowers should try and view student loans as an investment decision. By taking on student loans, they are investing in themselves and the fact that they’ll earn a higher salary with their degree. But a bad investment shouldn’t hamstring a student for the rest of their life, and this is why scholars such as Akers are advocating for the adoption of more unique, innovative safety net policies such as federal income share agreements.
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