I read an article this morning about something I had never heard of before: Income Share Agreements (ISA). When I attended Big Brother many years ago, my options for paying for school were limited. They included Mom and Dad, work, scholarships, and student loans. Admittedly, Big Brother was a lot less expensive at that time than it is today. I know this because I just finished paying for my daughter’s degree from Big Brother. ISAs place a new level of urgency on recruiting students. Here’s what they are and why they’re dangerous.
Unlike a traditional student loan, where the student borrows money and promises to repay it later, an ISA pays for a student’s college costs in exchange for a share of their future earnings. The repayment is not cheap. In the case laid out in the article, the borrower agreed to pay 25% of her future gross earnings for three years, and 7.5% of her gross earnings for three years after that.
Using simple figures, if the borrower lands a job making $100,000 per year following graduation, the total repayment cost will be about $97,500. The problem, of course, is that the reimbursements aren’t tax-free. So the formula calls for a payment of $25,000 per year (calculated on pre-tax salary), but the $25,000 comes out of the borrower’s net pay. Each ISA the student enters is structured to follow any existing ISAs. If the student takes this approach to paying for school, it could leave the student in debt for years. A student could also choose to make payments on a fixed debt amount. That approach was usually double or triple what the student borrowed.
Recruiting students keeps them away from financing scams
ISAs prey on the most vulnerable students. First, these students are unlikely to understand the financial deal they’ve gotten themselves into. Second, they’re unlikely to be able to give up 25% of their income for several years to repay the debt.
How does this relate to recruiting students? ISA lenders target low-income students – the same students who are likely to enroll at a community college. By directing these students into complex, expensive borrowing agreements, these entities move students away from affordable education and into wage slavery. Low income students are often the first in their families to attend college. They have limited experience with post-secondary education, and they often don’t understand federal financial aid.
By recruiting students who come from low-income homes, community colleges can intervene on a long-term cycle of high-cost debt. Students who opt for university transfers can learn about financial aid options while at the community college. In addition, since classes at the community college are less expensive, they can reduce their overall borrowing costs for their first degree.
Recruiting low-income students into community college classes is essential for their future success. At the very least, it would help them avoid financing nightmares like ISAs. But it requires a dedicated effort on the part of the Administration to make it happen.
That dedication is hard to come by when the administration focuses on building a hotel than running a community college.
Photo Credit: Marco Verch , via Flickr