Yuan: The Benefits of ISA

by Ziqin Yuan | 4/13/16 5:30pm

Purdue University recently announced a new program, “Back A Boiler,” that will give rising juniors and seniors an alternative way to pay back debt. The program’s website notes that this alternative is potentially less expensive than more traditional loans for students who need additional funding to pay for their education. This option is based on an income-share agreement, also known as an ISA, and gives students an award of $5,000 or more to complete their degree. Students will then repay the debt at a fixed rate in the years immediately after graduation. The repayment rate will be calculated based on a student’s anticipated salary and will continue for a fixed amount of years, up to nine. Worth mentioning here is that the interest rate is zero percent, and that students will not have to pay once the payment term is up. The ISA program will take effect at Purdue starting next month. Although time will tell whether this program is effective or not, ISA has the potential to be beneficial to both the school and the students. It is an option that Dartmouth should consider adopting in the future.

An ISA is not a new concept — Yale University attempted a version of this program in the 1970s. However, under Yale’s program, a cohort of undergraduate students agreed to pay back a percentage of their earnings until the entire cohort’s debt was paid off. This ended up failing because some students were frustrated that they had to pay more than their fair share, essentially paying for their classmates. Purdue’s new program eliminates this issue by making each loan personal — students will only be responsible for their own debt.

For a program like this to work, it has to be beneficial for the academic institution in question. Luckily, the program could be beneficial to colleges and universities. An ISA essentially provides a school with a stable income for years after the student graduates. Moreover, because the payment rate is based on the student’s anticipated salary after graduation— though Purdue does offer a six-month grace period — a student with a high anticipated salary can actually pay more than the funding was worth. In other words, Purdue is banking on its students’ success to make a profit.

This is helpful for students too. When a school’s profit is driven by its students’ success, the school will work harder to support its students. The school will devote more resources to train the graduates in useful skills that will translate into well-paying, successful careers. Of course, schools already know that their reputation is based on their students’ success, but an ISA program will quantify that approach and encourage a school’s administration to work harder for its student body.

ISA policies also benefit the students because they create a safety net. Students will repay a fixed percentage of their anticipated salary, so they will not have to worry about paying back loans that are worth much more than their entry-level income. Equally importantly, students will know exactly how long they have to make payments for and can plan around this.

These advantages are contingent on how precise the anticipated salary will be and which students will be allowed to enter the program. This is where potential problems can arise — if a student’s anticipated salary is much higher than the actual salary, then the student could still be forced to make payments they can not afford. However, this issue can be easily fixed. The program can base the payments off the actual salary students earn post-graduation — the payment rate will stay the same, but the amount the student pays will depend on how much she earns each year. One may argue that students will try to game the system by, for example, working at McDonald’s for the entire payment term. However, at a college like Dartmouth, where achievement is a huge part of campus culture, working at McDonald’s for nine years will not be appealing for anyone, especially not the students.

Another issue with an ISA program is that it may only accepts students that it believes will have high-paying jobs post-graduation, thus ensuring that the college will make a profit from its earlier investment in a select group of students. While this may seem unfair to many, it is also a huge incentive for students to aim for better-paying jobs.

An ISA program has the potential to be hugely beneficial for both the academic institution and the students. At Dartmouth, there are extremely high-achieving students; an ISA program can provide a loan to students who work hard and do well. It also provides a safety net for students — if they graduate during a recession, for example, and do not get a salary as high as they otherwise could, they will not be burdened by student debt for decades after graduation. In short, an ISA can limit the damage incurred for the school and the students when the job market is tough. It may be a gamble, but it is one well worth taking.