'Income Sharing' Is Wall Street's Potentially Predatory Alternative to Student Loans

It was inevitable that the “disruptors” of Wall Street and Silicon Valley would one day turn toward higher education. A decades-long march toward more and more student debt in America—the number has reached $1.5 trillion nationally—has made it clear that the college system is broken in all sorts of ways. The approach some of the top wizards of finance have been gravitating toward is a scheme centered on what are called “income share agreements” (ISAs). The idea is that you get to go to college—or some kind of vocational program—for free or close to it, but when you graduate, you owe a generous chunk of your newfound income to those who sponsored your education.

Programs like this are already in place at Purdue University in Indiana, but also, as the New York Times highlighted in a piece plugging the phenomenon Tuesday, the Lambda School, a start-up that provides free, targeted coursework online (typically for half a year) in exchange for 17 percent of your income when you graduate, payable over a period of two years. There are some provisions that make it attractive, at least in the Times‘s telling: If you make less than $50,000, you’re off the hook on those payments, and if you lose your job, you get a break from having to make them.

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For perspective on what it means that America’s financial mavens seem intent on treating students as instruments for capital investment—risks to be managed, in other words—and whether this is actually a worthwhile or wise way to avoid the debt train, I called up Julie Margetta Morgan. She’s a fellow at the left-leaning Roosevelt Institute, an expert on student loans, and a former senior policy advisor to Elizabeth Warren.

VICE: Does this concept of income sharing seem like a good idea to you in the abstract, and how established is it?
Julie Margetta Morgan: In a world where people have to borrow for college, I can understand where the impulse comes from to try to limit the amount that people have to take [on in debt] to a percentage of their income. If we’re thinking bigger [in terms of] in what we owe to students and to future generations of Americans, it starts to make a lot less sense. Because at the core of the problem here is we’re not investing in the future of the country. We’re saying, “Let’s minimize the risk” rather than, “Let’s start another generation of workers of our economy off on the right foot,” or, “Let’s think about solving income inequality or the racial wealth gap.” It’s clearly not the answer to those kind of questions.

How does this approach stack up in the broader context of old-school community colleges on one hand, and coder bootcamps and other alternatives to four-year college that are very profession-targeted?
It’s really hard to put it in that context. That gets to one of the core problems with this particular type of income share agreement: When you attend a community college, you have a sense of the overall cost of the program and a rough sense of [what] you’re getting out of it. The downside is that for many people that cost is more than they can pay, although it’s certainly significantly lower than attending a four-year school. A coding bootcamp [can have] a lower price tag associated with it and perhaps a lower amount of time, but I think there are significant questions about what exactly you’re getting for your money.

The Lambda program to me—and this is without a ton of information about exactly what it is—raises a ton of questions about value. The available [info] tells us you’re paying 17 percent of your salary for two years for what seems to be a six-month program. The question we’re being led to is: Is that doable, is that an affordable thing for a person to do, [to] which they’re suggesting the answer is yes. Your question of is that actually worth it—is that actually a decent amount of money to pay for the product they’re offering?—I think is a totally different question and one I’m really not sure [about]. I think it’s really difficult for a student to assess.

Aren’t you still going to be on the hook for books and housing, or am I misunderstanding how these programs tend to operate?
So in the Purdue one, it’s stacked on the rest of your financial aid. I think the one I’ve most closely seen as an alternative is a Plus loan, which is on top of your traditional federal student loans. So it’s aiming to help a person pay the full package of costs for college, which could include those costs of housing and books, depending on how the cost of attendance structured. But it’s on top of other forms of debt.

What do you see as the potential pitfalls or ways in which a system like this could go wrong?
Let me just list some of the ways. One, the system is in many ways not transparent to students. Particularly for the ISA’s that are stacked up with other types of financial aid, it’s very hard for an individual to figure out how much they’re paying. But like I said in the Lambda example, it’s a little bit difficult to understand what you’re getting for your money and to judge whether or not that 17 percent is a fair share of income to pay. I think another area in which these are problematic is that they’re not regulated in the same way student loans are regulated and they open up a lot of issues of consumer protection. We’ve seen these types of problems with the existing ISA system. So one is that they’re pushing the risk back onto students in very subtle ways.

A lot of times the other headline of these is that there’s very little risk to the individual as opposed to student loans, but in many cases, income share agreements are pushing the risk back onto student by having less favorable terms for students who are enrolled in less profitable majors, so they will pay a higher proportion of their income over a longer period of time. But the contract for these agreements—which I think is an area that hasn’t garnered a lot of attention—are also really problematic in terms of the ways in which they’re asking borrowers to waive their rights. (I’m going to call them borrowers even though I think there’s this whole [thing about how] it’s not credit.)

For example, in the sample contract that Purdue posts on its website for the Back-a-Boiler program, they’re asking borrowers to waive their rights to jury trial or class action lawsuits and instead [use] mandatory arbitration, and that’s a practice that’s been widely criticized, particularly in the area of for-profit colleges and college enrollment contracts in general. There’s no clear way in these contracts for borrowers to renegotiate the terms of it or to refinance. So for federal student loan borrowers, you have a variety of options for being able to change your payment terms if you get into trouble. We don’t [have] that option here. The Purdue contract, the sample contract, also says it can withhold tax refunds if you don’t make your payments. So they’re including some really aggressive collection tactics in these contracts which I don’t think has gotten the attention they deserve.

Which is interesting because the Times piece frames it as being relatively generous on the collection perspective: Well, if you lose your job or if you make less than $50k, you’re OK.
Right, so and I think that’s an area where I would really love to see the fine print of the contract. And to Purdue’s credit, they have put a lot of that fine print online for us to look at and that’s where we’re seeing the problems. In many cases we know that the institutions that are offering these income share agreements, the top line is: If you make less than a certain amount of money you don’t pay. But the fine print is: If you make less than a certain amount of money for a certain reason, you don’t pay. If you make less than that amount of money for a different reason, we’re going to lengthen the terms of your payment. There’s a lot of messing around there with whether or not nonpayment actually lengthens the terms of your contract with the income share provider.

There’s a bunch of facets to the problem, but what we see here is—in my mind—investors (whether schools or private investors) who are sort of trying to have their cake and eat it too. They’re trying to couch something as not a loan—they don’t want to see it as a credit product. They want to see it as something else or something better for marketing purposes, but also for legal purposes. If it’s not technically a credit product, then they’re not subject to the same anti-discrimination practices that credit products are subject to.

The Times piece alluded to the idea of “indentured servitude,” which is what critics are calling this. What do you make of the difference between two years of paying potentially a lot more than people pay on loans to potentially racking up interest on debt over decades? How do you square those?
It’s really hard to square without understanding what you get for your money. If I’m being asked to take 17 percent of my income and I’m getting something that really doesn’t bump me up much over what I would have paid otherwise, then I would say it’s much more valuable to go to school for longer [and pay for longer] and get a more valuable degree.

The larger point here is that we’ve been pushed into this world where we’re asking people to make these really complex calculations about future income and payoff and that just doesn’t seem like it’s the world we ought to be living in, where people have to make extreme calculations to make sure that they make some modest amount more than they would have otherwise.

Which brings me to my last question. Why do we need a Silicon Valley/Wall Street disruption scheme for a problem that seems to have a proven solution in Scandinavian countries, among others? Isn’t this a sort of profit-motivated solution for something that could theoretically be fixed differently?
It could absolutely be fixed differently. it could be fixed with government investment and arguably it sort of is because the people who are attending these schools are paying taxes and are being asked to pay twice. I know these are private schools in the Lambda case but in other cases these are public institutions. We have another solution for paying for college. There’s a lot to be said for limiting payments to a percentage of income, but it does put us in a world where we think about the value of education as what it provides—what we can extract from people. Or what we can justify extracting from people based on their future income.

I do think we ought to be asking questions about the investors in this case and why they are investing. Why is it profitable? How profitable is it? Is that a good thing for students? At a basic level, should we be instituting protections such that the profit motive doesn’t run these programs in a way that really hurts consumers?

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