We research all brands listed and may earn a fee from our partners. Research and financial considerations may influence how brands are displayed. Not all brands are included. Learn more.

  1. Education
  2. Paying for College

A Hot New Way to Pay for College Makes Parents Suspicious

By:
Kim Clark
6 min read
A large archway stands over the entrance to Stadium Mall on the campus of Purdue University in West Lafayette, Indiana, U.S., on Monday, Oct. 22, 2012. Administrative costs on college campuses are soaring, crowding out instruction at a time of skyrocketing tuition and $1 trillion in outstanding student loans. At Purdue and other U.S. college campuses, bureaucratic growth is pitting professors against administrators and sparking complaints that tight budgets could be spent more efficiently. - Daniel Acker—Bloomberg via Getty Images
A large archway stands over the entrance to Stadium Mall on the campus of Purdue University in West Lafayette, Indiana, U.S., on Monday, Oct. 22, 2012. Administrative costs on college campuses are soaring, crowding out instruction at a time of skyrocketing tuition and $1 trillion in outstanding student loans. At Purdue and other U.S. college campuses, bureaucratic growth is pitting professors against administrators and sparking complaints that tight budgets could be spent more efficiently. Daniel Acker—Bloomberg via Getty Images

A new option for paying for college is dogged by suspicion and controversy, the American Enterprise Institute has found.

For more than 60 years, economists have been trying to persuade colleges, investors and students to try out “income share agreements” – allowing students to get free tuition in return for paying whoever fronted their tuition - a government agency, their college, or a private investor - a percentage of their income after they graduate.

It’s a concept beloved by economists, who note that Nobel Prize winner Milton Friedman proposed it in 1955. (He called the idea "human capital investments.")

But they are only now taking off. A few coding academies started offering the option in the last few years. This fall, Purdue University launched the first significant ISA experiment with “Back a Boiler,” which students can use to raise, say, $10,000 for tuition, in return for 2% to 5% of their salary for up to 10 years. (Engineers pay a smaller percentage for a shorter time than, say, social workers.) Only about 150 Boilermakers have agreed to the deal so far, a number Purdue Foundation spokeswoman Cynthia Sequin says the school is hoping to increase over the next year.

In focus group interviews of 10 parents and 10 students each in Columbus, OH, and Boston, the AEI found that there may be good reasons that the idea has gained so little traction so far: “It’s not as intuitive as Milton Friedman thought,” says Alexander Holt, who wrote the AEI report.

In fact, he found that many people were initially suspicious of the idea because they hadn’t heard of it.

After it was explained, opinions were divided.

Many, mostly students, loved the idea because it meant that if they ended up unemployed or with a low-paying job, they wouldn’t go broke trying to repay a student loan, Holt found. “This is a great safety net,” one student concluded. (While student loans charge interest that builds up every month, ISAs are only a claim on a small percentage of a student's earnings over a set period of time. So after the student makes the agreed-upon number of income-based payments, there is no further obligation - even if the amount paid is far less than the funding originally provided.)

The parents in the focus group, however, generally seemed to have a more difficult time understanding how ISAs differ from student loans, Holt said. Some parents resisted the idea because the students who ended up earning a lot of money would pay more than they might with a loan. One called the possibility of higher payments for higher earners “un-American.”

The focus groups showed how unrealistic supposedly elegant economic theories can be, Holt noted. There were at least three important conflicts between economists’ ideas about ISAs and what people in the focus groups said they would agree to:

Holt said that, overall, most of the focus group members were intrigued when they learned about ISAs.

But the general tenor of the focus groups' comments made it clear that “there are things about the product that are not likable,” Holt said. Many students would likely be leery unless colleges or investors figure out a way to address concerns about high payments, for example, he said.

Even if they did, Holt added, “there are some people for whom this product just isn’t for them.”

Tags