Brings the Investors to the Students,
Lessens Dependence on Lenders
Student loan debt is plaguing college graduates across the United States. In the first quarter of 2018, graduates owed over 1.5 trillion dollars in loan payments. The average college graduate holds loans equal to a down payment on a home, a car, or a wedding. The cost of the loans are stifling adult graduates from purchasing those things and from starting others, such as their own businesses or saving for retirement.
Despite the apparent inevitability of student loan debt, more high school graduates are attending college than ever before, which is partially why overall student loan debt has skyrocketed in recent years. The job market is demanding more skilled and higher-educated workers, so more education is necessary; it is anticipated that by 2020, 65 percent of all jobs will require education beyond high school. Paradoxically, while postsecondary education becomes less financially feasible, it becomes more necessary than ever for American students to pursue it.
Wanting to help their students avoid burdensome student debt, Purdue University has developed a program, partnering with Vemo Education, to facilitate Income Share Agreements (ISAs) between undergraduate students and individual investors.
Income Share Agreements, initially proposed by Milton Friedman in the 1950s, are contracts between students and investors that allow the investor to pay a portion of the student’s tuition up front. Upon employment after graduation, the student pays the investor an agreed upon portion of their income over a predetermined time period. One benefit of an ISA is that it has no principal balance or interest, so the amount owed to the investor never grows.
Coined Back a Boiler, the program connects undergraduates with investors, typically Purdue alumni, based on the student’s major and interests. A contract is then developed based on the student’s anticipated future income. The student commits to paying the investor a percentage of their future income, so if the student’s initial income is less than anticipated, the loan payments adjust to accommodate the student’s earnings. In other words, the student will never have to pay more than what is feasible in a given month.
So far, Back a Boiler has enrolled 478 students who have received $5.9 million in funding. Over 100 majors are represented in those 478 students, demonstrating that investors are supporting students with diverse interests and career aspirations. Purdue hopes to expand the program to more students and to aid in the creation of ISA legislation with the federal government so that more schools can use this tool to help reduce overall student debt.
Pioneer Institute congratulates Cynthia Sequin, Assistant Vice President of Marketing and Communications for Purdue Research Foundation, and Mary-Claire Cartwright, Vice President of Information Technology for Purdue Research Foundation and manager of the Back a Boiler program, on their winning submission.