Written by Chelsi Chang
This is part one of a three-part series.
Tuition is expensive. The staggering amount of debt amassed through student loans has prompted the phrase “student loan crisis.” Time reports that the 44 million American student debtors’ total debt stands at around $1.5 trillion. As astounding as these facts may be, they’ve lost their shock value. Student debt is so ubiquitous, Americans almost forget it isn’t the norm. And while all hope for equitable tuition rates may seem to be lost, there are many organizations—in both the public and private sector—trying to find better solutions for future students.
One option that has received considerable press within the past few years is the Income Share Agreement (ISA), another option for financing students’ education. Under an ISA, students are not expected to pay for their education up front. Instead, they pay a fixed percentage of their post-graduation income over a fixed period of time. One of the main tenets of ISAs is the minimum income threshold, which protects those who earn below a certain monthly salary from making ISA payments until their income increases. For instance, if a school’s minimum income threshold were $40,000 a year and a student were earning $35,000 a year, a student would not be expected to make payments.
However, every ISA contract functions differently. In some ISA programs, each major has a different monthly payment percentage and maximum payment period. In such programs, students who are more likely to earn a higher post-graduation salary—for instance, STEM majors—may have shorter payment periods designed to keep their total payments compared to their peers’.
ISAs give students the freedom to make decisions about colleges based on schools’ programs, prestige, faculty, and fit rather than the “sticker price.” Purdue University was one of the most notable universities to adopt the ISA model as an option for funding students’ education. The Back a Boiler ISA Program at Purdue University describes ISAs as “an alternative to private and parent PLUS loans.” To date, the program has 1,200 students participating in an ISA across over 150 majors. The program, and many like it, was built in partnership with Vemo Education. At the moment, Vemo is the preeminent educational ISA platform-provider in the United States.
ISAs give students the freedom to make decisions about colleges based on schools’ programs, prestige, faculty, and fit rather than the “sticker price.”
This seemingly innovative financing model has faced skepticism from the market. Some worry that—for schools with variable income percentages—admissions may become biased toward students with higher projected salaries. Others worry about the lack of federal regulation for this new financing model. Some say that ISAs may cause students to pay more for their education than simply taking out a federal loan.
To clear up some of this confusion, we sat down with the Chief of Staff at Vemo, Shanaz Chowdhery. Chowdhery was a first-generation Yale graduate and Pell Grant recipient. She spent time working with Teach for America and General Assembly, where she piloted her first ISA program. Over her lifetime, she has used both ISAs and student loans to fund her professional development. Between them, Chowdhery prefers ISAs because they offered her the “freedom and flexibility” to move across jobs with often-disparate incomes.
Can you tell me a little about Vemo?
Vemo is on a mission to transform the way that schools attract students and measure outcomes. So, we work with schools to provide strategic guidance, robust data collection, and collaborative partnerships and use those components to help institutions confront their most pressing issues head on. We do everything from reimagined financial aid packaging to data-driven enrollment management to make sure we are advancing clear, strategic objectives for schools: higher yield, improved retention, accelerated completion, and more. Our goal is help transform the relationship between schools and students so that schools can serve their students better.
I want to touch on something you said before. You discuss data-driven ISAs. Can you discuss more about what Vemo actually looks at?
The beauty of income share agreements is that they provide schools with detailed feedback schools may not otherwise ever have access to: At a granular level, schools see what happens to their students after graduation. Because the payment is income contingent, Vemo goes through the process of verifying participants’ income and employment in order to bill them appropriately. We are able to capture data like how long it takes for students to get jobs after they graduate and how long they’re employed in those jobs. Data like these are super useful for colleges and universities looking for additional services they could be offering to better support students.
Have you seen any colleges take the data and run with it, developing better programs for their students? Or have you found students may not be making as much as expected post-graduation?
The ISA market is still nascent, and it is hard to draw statistically significant conclusions just yet about how ISAs at specific colleges can drive specific things. As an example, many of our college partners offered ISAs to freshmen, and those freshmen may not have even graduated yet, so we don’t have the data on what will happen to them post-graduation.
What would you say is the average percentage that an ISA would take in a student’s income over a set period of time?
Good question. I think a misconception is that ISA programs are the same, and the answer is that they’re not. There’s no meaningful “average” income share. Colleges’ income shares typically fall somewhere in the single digits, but participants’ payment terms are often longer compared with those for skills-based educational ISAs. ISA terms depend on a participant’s funding amount and on the nature of the program. They vary greatly from program to program.
What are the most beneficial reasons to use an ISA?
I think there are lots of reasons. The downside risk protection, so if you are below the minimum income threshold, you don’t have to make a payment. Another is the flexible payment that aligns with earnings, so that students get protection from income volatility. As I mentioned earlier, with traditional loans, you have fixed monthly payments regardless of financial circumstances, whereas ISA payments vary with students’ earnings. It provides flexibility if a graduate hits a rough patch. And there’s upside protection as well. There’s always a payment cap that indicates the highest amount a student could end up paying.
Another benefit is the lower up-front costs that reduce barriers to entry. So, when a student is making a choice about an educational institution she wants to attend, there are two major questions to ask, “Am I able to pay this?” and “How do I know this school is going to give me a return on investment?” ISAs satisfy both those questions. They reduce the up-front obligation, and then they signal an investment in post-graduation success.
There is also a pay-it-forward component. In many ISA programs, the payment is actually used to support future cohorts of students. It’s something that’s really beautiful. It’s not a payment for the sake of a payment: It will support future students.
What does Vemo’s contract with an institution offering ISAs look like?
We seek to establish a contract that lasts at least a few years, so that we can grow and scale the program, take learnings, and incorporate best practices.
*Answers have been edited for clarity and length.