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WEST LAFAYETTE, Ind. — One day in 2017, Lauren Neuwirth sank into a chair in her university’s financial aid office feeling out of options. She was finishing her second year at Purdue University in northwest Indiana, a school she’d chosen for its top-ranked engineering program. Neuwirth, who grew up near Milwaukee, was working two jobs to cover her living expenses and quickly running through the money her mother had set aside for college. Federal student loans only covered some of Purdue’s pricey out-of-state tuition. She worried that to remain in school she’d have to take out expensive private loans or join the Army.
But then Purdue offered her another way to pay. Investors — including wealthy alumni, a hedge fund and the Purdue Research Foundation — would front her $50,000 to cover two years of college. In exchange, she’d owe them 14.8 percent of whatever income she earned in the eight years after she graduated. Neuwirth agreed. Last fall, her fifth and final year as a double major in food science and biological engineering, she received a job offer from the agribusiness Cargill at a salary of $56,000. If all goes as planned, she’ll eventually return a healthy profit for those investors.
“It has afforded me the opportunity to stay at Purdue,” said Neuwirth, 22, who spent last summer as a Cargill intern tinkering with the corn-flour mixture that coats McDonald’s Chicken McNuggets. “But it’s tricky,” she said, “because I’m going to have that pulled from my income, and then I’m also going to have to be paying off those federal loans. That makes me a little uneasy.”
This kind of arrangement, known as an income share agreement, or ISA, has been used in a smattering of places, but hasn’t gained much traction in the United States — until recently. Now, more than five dozen U.S. universities and coding schools use ISAs, and, in December, the Department of Education said it would experiment with offering them. Senators have introduced bipartisan legislation to regulate the tools, and investors are taking notice.
As ISAs migrate from the margins of financial aid to the mainstream, the debate around them grows louder. Proponents tout the safety net they offer: With ISAs, unlike with loans, graduates pay nothing if they can find only low-wage work, and there are often limits on ISAs’ duration and on the total amount graduates must repay. “It makes college less risky,” said Beth Akers, a senior fellow at the Manhattan Institute, a conservative think tank.
The tool could produce other benefits: Investing directly in ISAs, as Purdue has done, gives schools a financial incentive to help their students through to graduation and into good jobs.
But critics of ISAs argue that they are just a new spin on debt. Some contract terms are less rosy than they first appear: Most graduates will likely end up paying far more than they receive (Purdue’s cap is 2.31 times the size of the initial payment), and under some contracts, the repayment period is extended if students earn too little. Uncertainties abound, such as what happens if graduates have difficulty making payments. Education experts worry that investors gambling on students’ futures could produce all kinds of harms, from discrimination against students who are expected to earn less to hastening the transformation of colleges from places of learning to engines of skilled workforce production. At Purdue, for example, students studying for degrees that usually lead to low-paying fields are saddled with the most burdensome repayment terms.
“My fear is that students, and particularly low-income, first-generation students, will end up paying more for their educations than they would have if they’d taken out traditional loans,” said Mark Becker, president of Georgia State University. “The reality is that investors are investing to make money; this is not an altruistic undertaking.”
These concerns notwithstanding, graduates who’ve started paying off their ISAs say they weigh less heavily than loans. Charlotte Herbert financed her senior year at Purdue with an income share agreement for roughly $27,000; each month, on top of her federal student loan payments, she pays her investors 10 percent of her $38,000 pre-tax salary, and will continue to do so for the next seven years. “Knowing that it’s never going to be more than 10 percent of my income was rather reassuring,” said Herbert, 24, a technical writer of guidebooks and manuals for an engineering firm. “My big concern with my loans is, because of the interest, it’s just going to keep going. I’m constantly looking at how I can squeeze out a little bit more to outpace the interest.”
An hour’s drive from Purdue, Kenzie Academy, a for-profit tech school located in a former opera house in downtown Indianapolis, is explicitly churning out graduates for well-paying jobs. One recent morning, nine students sat at white tables as an instructor wearing a blue Kenzie T-shirt fielded questions on how to tailor their resumes for jobs in software engineering and user-experience design.
“Our entire survival depends on our students being successful,” said Chok Ooi (pronounced “Oy”), Kenzie’s 39-year-old founder, sitting in a glass-walled room by the school’s entrance that looks out on exposed brick walls, Wayfair furniture and an open floor plan. “So we really truly invest in our students.”
Ooi, who grew up in Malaysia and moved to the United States for college, opened Kenzie in September 2017 with the goal of closing the gap between workers’ skills and the needs of the growing tech industry in Indianapolis and beyond. He sought to attract students who’d been displaced by automation; wanted a quicker, cheaper way into the tech workforce than college; or were looking for a fresh start. Like most coding schools, Kenzie doesn’t qualify for federal financing, so students had few options beyond pricey private loans (assuming they had the credit scores to obtain them). Ooi researched the ISA model and liked what he saw. Students can pay tuition of $24,000 outright if they have the money, but today, most of Kenzie’s 500 students pay for the school with ISAs.
Kenzie’s ISA terms work like this: Students pay $100 up front and no tuition until they secure a job with a salary of at least $40,000. Once they do, they pay 13 percent of their monthly income for four years, up to a maximum of $42,000. If they lose their job or their income dips below $40,000, the payment time frame can stretch up to eight years.
To win admission, applicants are tested on their problem-solving abilities; about 25 percent of those who interview are accepted, the school says. Admitted students must pass additional hurdles to qualify for an ISA, such as demonstrating that their existing debts won’t prevent them from managing their income-share obligations.
Some Kenzie students hold bachelor’s degrees that didn’t aid them in the job market. Nick Howell is one. Howell, 35, graduated from Purdue with an associate degree in professional flight and a bachelor’s in business. But he could only find low-paying warehouse and office jobs, he said, and entered collection on the $50,000-plus he owed in student loans. He is now in a federal income-driven repayment plan that obligates him to pay 3 percent of his income to the government — down from 7 percent after Howell recently renegotiated it — but interest is still accruing.
In 2018, Howell enrolled at Kenzie with the hope of acquiring marketable skills. Within a year of starting, he received a job offer from a big web development firm. Today, he’s earning $55,000 a year making websites for car companies. Between his financial commitments on his Kenzie and Purdue degrees, he’s paying out 16 percent of his income, but he says it’s manageable because his wife makes a decent salary as a lab tech.
“We’re doing way better than we were before,” said Howell, who grew up in Crawfordsville, near Indianapolis. “Traditional loans are a scam,” he added. “I will 110 percent push income share agreements on people over taking traditional loans just for the fact that, yes, the percentage is higher, but it’s based off (a) a job you have, and you pay zero if you don’t have a job, and (b) there’s no interest.”
The school got a big boost last fall, when San Francisco-based impact investment firm Community Investment Management said it would lend Kenzie up to $100 million to expand its number of students receiving ISAs into the thousands. Jacob Haar, managing partner of Community Investment Management, said the firm spent three years researching schools before choosing Kenzie because it focused on underserved students outside of tech hubs like the Bay Area, and it showed early success in helping students into good jobs. (Approximately 90 percent of Kenzie graduates find jobs that pay at least $40,000, the school says.) Under the deal, Kenzie will hold ISA contracts directly with the students, but Community Investment Management can halt its investment if graduation rates and job placement rates tumble, Haar said.
So far, the infusion of cash has been good for students: It enabled Kenzie to cut the share of income it requires of graduates to 13 percent, from 17.5 percent.
In the event of an economic downturn, though, graduates’ earnings — and Kenzie’s returns — could fall. But Ooi said he thinks that the pace of technological change is only going to intensify companies’ need for workers, sending more students to the school. He also thinks more students will start choosing places like Kenzie in lieu of four-year schools. “It’s a half-a-trillion-a-year tuition business with a very low satisfaction rate,” he said of traditional higher education.
Purdue’s president, Mitch Daniels, agrees that colleges have put too little emphasis on helping their graduates succeed, and he sees income share agreements as a way to push schools in that direction. “One very legitimate criticism of higher education is it’s been charging higher amounts for a product of unproven quality,” he said. “Higher education has been very resistant to proposals that they have some skin in the game, that they accept some proportion of the risk for student default.”
In 2016, the university launched its income share agreement program, named “Back a Boiler” after the school’s mascot, a mini-locomotive called the Boilermaker Special. Since then, more than 750 students have signed up. The program is managed by the Purdue Research Foundation, a separate nonprofit that invests directly in the ISA fund and raises money for it from outside investors.
Daniels, a former Republican governor of Indiana, articulates a relatively narrow role for ISAs: as a replacement for high-interest private student loans and federal Parent PLUS loans. He doesn’t think they can compete with subsidized federal loans, and notes that the government already runs an income-driven repayment program itself, although those loans continue to accrue interest. Still, some Purdue students use ISAs to replace federal loans. Herbert, for example, could have accessed more federal loans her senior year but decided the ISA was a better option because of downside protections like its built-in end date.
Other four-year schools are using ISAs to fill different gaps. Colorado Mountain College, for example, is using ISAs for undocumented students (who don’t qualify for federal loans).
Even some ISA skeptics say that if done well they could be a better alternative to private loans. “Is it a safer cigarette? Maybe,” said Jessica Thompson, associate vice president with the nonprofit Institute for College Access & Success.
Instead of assessing borrowers based on their creditworthiness, ISA investors evaluate students’ earning potential. And that’s where things get tricky. At Purdue, one feature has proved particularly controversial: Students with the lowest earning potential receive the worst repayment terms. For example, Savannah Marina Williams, a senior from Auburn, Indiana, working toward a degree in the low-paying field of education, was fronted roughly $30,000 by Purdue, nearly $20,000 less than Neuwirth, the bioengineering student. But Williams is obligated to pay roughly the same share of her income as Neuwirth, nearly 15 percent, and she’ll be paying it for 10 years instead of eight. Paul James Laurora, a chemical engineering graduate from New Jersey who was also provided more upfront money than Williams — $33,500 — received more generous terms. He’s paying 9.6 percent of his salary for 7.5 years.
The model is designed so that most students end up generating more or less the same return for investors. But some education experts argue that financial aid is meant to level the playing field and help generate economic mobility, not burden the most vulnerable. Plus, critics say, such terms could have a disproportionately negative impact on women and people of color, who are more likely to major in low-paying fields like social work, and less likely to major in high-paying fields like engineering. Income share agreements could thus run afoul of fair lending laws and even exacerbate race and gender wealth gaps.
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At the same time, more investors are starting to view students as a promising asset class. Christopher Ricciardi is a managing partner with FlowPoint Capital Partners, a New York investment firm; he is known as “the grandfather of CDOs” for his role in popularizing collateralized debt obligations, the tools that seeded the 2008 financial crisis. This past fall, FlowPoint unveiled edly, an online marketplace that matches schools selling “shares” of their students’ ISAs with accredited investors. Ricciardi envisions that the market for ISAs could replace the entire $10 billion private loan market and then some, growing to at least $20 billion.
The platform solves a problem facing schools that use ISAs to fund their programs: It gives them some money up front, before students graduate and start repaying. In exchange, investors get partial rights to future payments from bundles of ISAs. Unlike Purdue, the platform doesn’t stick students in different fields of study with different payment terms. Instead, investors can choose which types of students and which schools they want to buy a stake in. Ricciardi said some investors comfortable with lower returns have already signaled their interest in bankrolling future social workers and teachers, whereas more profit-minded investors can choose to throw their money behind future engineers. So far, a dozen institutions (coding and vocational schools and one for-profit university) have signed on, and more than two dozen investors have put up about $20 million, Ricciardi and his colleagues said.
His firm is trying to ensure strong returns for investors — 10 to 15 percent annually, according to the edly website — by working only with schools whose graduates have been successful in the job market and giving better financing terms to schools with stronger performance. That kind of talk makes some higher education experts wary: Could it lead to capital flowing only to job-focused schools, shifting the purpose of higher education from learning to preparation for certain well-paying jobs? At the same time, because participating schools cede to investors a partial stake in their income share agreements with students, critics argue that investor decisions will increasingly drive the schools’ operations. “ISAs are predatory,” said Kim Crayton, a business strategist and founder of #causeascene, an organization focused on making the tech world more inclusive.
The Senate bill introduced last year would treat income share agreements as a new category, apart from loans, and exempt from usury laws and other protections afforded to borrowers. Proponents say the legislation is necessary to regulate ISAs, and that ISAs are distinct from debt. But consumer advocates argue that the legislation provides a back door around lending rules, and that it could leave students vulnerable. “It’s exceedingly unclear how these products — especially products that are broad-based, across schools, across programs — expect to comport with basic fair lending laws that have been on the books for decades,” said Seth Frotman, a former Consumer Financial Protection Bureau official who now runs the nonprofit Student Borrower Protection Center.
After a Department of Education official mentioned the agency’s interest in income share agreements last May, the idea drew the ire of Senator Elizabeth Warren (D-Massachusetts), who joined colleagues in asking the department for more details of its plan. “It is deeply disturbing to see a Department official boosting novel forms of student debt instead of trying to stem the tide of indebtedness,” they wrote, adding that ISAs “carry many common pitfalls of private student loans — with the added danger of deceptive rhetoric and marketing.”
Even if the marketing of income share agreements isn’t deceptive, it can be confusing. Laurora, the Purdue chemical engineering graduate, said he only realized after his payments kicked in that his contributions would be determined from his gross, not his net, pay. That leaves him less money each month than he budgeted.
And while some students say they’re glad for the chance to be treated as investments, not debtors, income share agreements don’t change the fact that the students will owe tens of thousands of dollars for their degrees. Plus, high tuition costs mean that students often have to take out loans on top of their ISAs, pinching them in repayment.
Neuwirth, the Purdue senior, took out four different income share agreements, totaling $50,000. But that still wasn’t enough to cover her costs, so she had to turn to private loans.
The youngest of three children raised by a single mother, Neuwirth could have gone to an in-state school in Wisconsin. But she felt an engineering degree from Purdue would help her achieve a secure future. Now, with her job at Cargill in hand, she doesn’t regret the decision. But the 14.8 percent of her salary she’s paying the school for her ISA “seems a little excessive to me.” She added: “It’s a little scary.”
Still, Neuwirth said she doesn’t begrudge Purdue the chance to benefit from her success, since the income share agreement allowed her to stay on campus and finish her degree. She said, “It’s good that I’m making Purdue some money.”
This story about income share agreements was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for the Hechinger newsletter.