Concerns grow alongside popularity of income-based student loans

As total student debt in the US reaches $1.5 trillion (£1.2 trillion), policymakers and private lenders – as well as universities – are increasingly turning to income-based repayment as a potential solution.

The model ties repayments to salaries for a fixed term and is seen as a way of preventing borrowers from owing more than they earn.

But advocacy groups are warning that the private versions may offer students little relief and greatly increase their long-term costs.

“It’s a little overbearing to use [the term] ‘indentured servitude’,” Jessica Thompson, director of policy and planning at the Institute for College Access & Success, said of some of the more emphatic criticisms of the private version, “but it’s a little bit more like that model.”

That’s because the private offering – known as an income share agreement (Isa) – has no principal balance or interest. Instead, the student agrees to pay the private investor or the institution a certain percentage of his or her salary for a set period of time after graduation.

That concept by itself may not be problematic, Ms Thompson said. But in practice, the private lender will tend to have high costs to cover, since it lacks the government’s top-shelf creditworthiness and ability to compel repayment.

That built-in cost is compounded by the known history of many private lenders to use their sophistication to further disadvantage borrowers, Ms Thompson said. That power appears even stronger in an Isa compared with a traditional borrowing arrangement, she said, given the bewildering notion of an undergraduate student calculating field-specific future income possibilities.

Such concern is now reaching Congress. Mark Takano, the chair of the House Committee on Veterans’ Affairs, told a recent congressional hearing that the history of the private market abuses in college financing leaves him worried about Isas.

“Speaking frankly,” Mr Takano said, “I see Isas as another way to push the private market on to students, which has never resulted in positive outcomes.”

The emerging controversy stands in contrast to the bipartisan backing for the various forms of income-based repayment run by the federal government. There are now a half-dozen such federal programmes dating back as far as the George W. Bush administration, including models created by Congress and the Obama administration.

Donald Trump endorsed Isas as a presidential candidate, and all three of his administration’s annual budget proposals have included them. About 7 million US students now participate in them, and student advocacy groups consider the biggest problem with them to be the relative lack of their use and awareness of their benefits.

In addition to offering lower costs than private models, Ms Thompson said, federal income-based repayment programmes offered full forgiveness after the borrower has been paying for a certain number of years.

“Pretty much there’s widespread support for the concept of the federal income-driven repayment plan,” she said.

Yet the private options are steadily growing, with providers describing their products as a useful addition that can offer better long-term outcomes.

Lenders include Lumni, Upstart and Vemo. Popular targets are students in short-term courses such as computer-coding boot camps. But some higher education institutions are offering their own products, including Purdue, Clarkson and Norwich universities, and Allan Hancock and Lackawanna colleges.

Purdue works with Vemo, and typically offers a 10-year repayment period, beginning six months after the student graduates and becomes employed with a minimum annual salary of $20,000 (£15,216).

Several hundred Purdue students have tried it, and university leaders have described investors as eager to join in. The Purdue Research Foundation announced in December that it had raised more than $10 million (£7.6 million) from outside partners for its Isa programme, known as Back a Boiler.

That’s “strong indication of the growing interest in income share agreements as an alternative” to traditional federal and private loan options, said the foundation’s president, Brian Edelman.

Beyond the fears of lenders abusing students, the private Isa providers might yet struggle to overcome the inherent difficulty of finding a workable cost structure given the wider number of variables.

Repayment percentages in Isas tend to be lower for higher-paying careers such as medicine and engineering. One of the oldest such efforts, launched at Yale University in the early 1970s, failed by the end of the century in part because wealthier alumni grew tired of compensating for their less-prosperous classmates.

The lesson from the Yale experiment, Ms Thompson said, “is that we can’t rely on small targeted approaches that are not universally applied, that are not equally applied, and assume the goodwill and good faith of everybody involved”.

“It reinforces the idea that financing higher education is a public good,” she said, “and doing it equitably is a public good.”

paul.basken@timeshighereducation.com