Giving Compass' Take:

• Melanie A. Zaber and Kathryn Edwards break down the pros, cons, and unknowns of income share agreements. 

• How can funders work to fill in the knowledge gaps around income share agreements? What are some unintended consequences of income share agreements? 

• Read more about schools that have implemented income share agreements. 

While policymakers debate options to address college affordability and the nation's mounting student loan debt, an alternative education financing model has been gaining ground in a handful of schools and state legislatures—the income share agreement (ISA).

In theory, an ISA allows a prospective postsecondary student to figuratively put him or herself on a stock market of sorts, selling shares of future income in exchange for tuition payments. In theory, investors could consider many elements indicating risk—like major, high school grades, and test scores—and fund students with the best prospects. In practice, ISAs are offered by educational institutions, not investors. Current repayment terms vary only by a student's field of study and school, and the realized cost of an ISA-funded education depends on the student's financial success. In this setup, students agree to pay back a percentage of their salary to their lender: their university, college, or other institution of higher education.

Like an insurance policy, this agreement reduces financial risks for students, but that reduction comes at a cost—graduates who excel will pay comparatively higher effective interest rates.

To date, ISAs are available from a number of four-year schools as well as accelerated degree programs, certificate programs, and even coding bootcamps. Some institutionsuse them as a last resort for those who have exhausted other aid options; others offer them for special populations. While ISA terms vary from institution to institution, they are all based on the same premise: the more income a graduate makes, the more they will pay back.

ISAs can increase the flexibility of higher education finance. Many students require more aid than the subsidized federal student loan maximum, but if they lack a credit-worthy cosigner, finding affordable financing can be a challenge. Similarly, students and their families can experience a financial shock while in school that changes their ability to finance a loan. ISAs in which terms are based only on major, not on socioeconomic standing, have the potential to improve college access and persistence, enabling students to maintain their graduation timelines.

ISAs may also shift incentives for students and graduates. As ISA repayment percentages and periods typically differ across fields of study, ISA-funded students might select majors with better payment terms. Job-searching graduates, without a fixed loan repayment, could opt for jobs with better opportunity for intellectual growth or life satisfaction, rather than the highest pay. ISA payment deferment policies could even change who temporarily exits the labor market to attend graduate school or care for children.

So, do ISAs work? Despite this increasing interest in ISAs, there has been little research on their effects on the outcomes, choices, and incentives we have discussed. As Purdue's first ISA cohorts make their way through the labor market, initial insights into repayment rates, job placement, and frequency of deferment will become available. The sustainability of ISAs is similarly unproven: a number of ISA-funded coding bootcamp programs have shuttered.

Read the full article about income share agreements by Melanie A. Zaber and Kathryn Edwards at RAND Corporation.