What If Your University Tuition Was Based On Your Future Salary?

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Written by Dana Sanchez
Income share agreements
With student loan debt approaching $1.6T, the old way isn’t working. Income share agreements are growing more popular as alternative college financing. Students cheer at Howard University as President Barack Obama delivers a graduation commencement speech, May 7, 2016. ( AP Photo/Jose Luis Magana)

With student loan debt approaching $1.6 trillion, the old way of financing higher education isn’t working.

Income share agreements are an alternative form of college financing increasingly popular with some critics of student loans. They offer students financial support upfront in exchange for students repaying a portion of their income down the road when they are employed.

Donna G. of Loxahatchee borrowed $35,500 in student loans for a bachelor’s degree in landscape architecture in 2000. Nineteen years later, she still owes around $23,000 and estimates her final student loan bill will total $94,390. “I hope to (get) this sick animal off my back in the next twenty-four months,” she wrote at StudentDebtCrisis.org. “I no longer work in the field of this original loan due to layoffs in 2008. I work in public service now.”

You probably know a story worse than that, and it may be your own story.

A story of crippling student loan debt inspired Austen Allred in what he says became his life’s mission — derisking higher education. Allred founded Lambda School, an online school offering computer science education that’s free until you get a job.

Lambda says it’s pioneering a new model of higher education in which the school invests in the students, instead of the other way around.

A combination of a school and an investment fund, Lambda has raised $48.1 million in funding. It participated in the summer 2017 batch of Y Combinator. Its mission, it says, is to find untapped or underutilized talent, and train that talent for the most in-demand jobs in the world.

Allred said he believes in not only reducing the cost of higher education but eliminating the risk. “We need to replace the current model of education with something that doesn’t leave people broke for the rest of their lives if it doesn’t work out,” he wrote in a 2017 Medium post.

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Allred identifies the financial cost of higher education as one of the core sources of risk at play.

In a recent Harvard Business Review article, he proposes redesigning financial cost as “a real chance for building a very different educational future.”

Income share agreements to derisk financial costs

Allred proposes income share agreements, where the school invests first in the form of overhead, education, and support. Students pay nothing (or little) money upfront and are incentivized to get a high-paying job. They pay an agreed-upon percentage of their income to the school after they get a job. The school doesn’t make money unless its students do.

A growing number of educators including Purdue University, University of Utah and Colorado Mountain College are testing their own versions of income share agreements, Allred writes. Purdue announced that a record number of students are using them — more than 25 percent this year compared to the same time last year.

With Lambda School’s model, students don’t pay anything until they get a job in their field earning more than $50,000. Then they pay 17 percent of their salary for 24 months, capped at $30,000 total.

“This setup means that long-term, we simply won’t survive as a company if we don’t make sure our students succeed,” Allred wrote in Harvard Business Review. “If a student doesn’t land a job paying $50K or more in their desired field, we still terminate the agreement after five years, even if they paid nothing. And if a student secures a job but then loses it or leaves it, we pause payments with no interest.”

Lambda students can also apply for a living stipend of $2,000 per month to help cover living expenses during the school’s nine-month full-time program. They then pay back 10 percent of their salary for five years (instead of 17 percent for two years).

Supporters of income share agreements argue that because they are mainly offered by private investors, they introduce more market discipline into higher education financing, InsideHigherEd reported.

Critics argue that income share agreements have the same potential pitfalls as private student loans. They also argue that graduates with high salaries could end up paying more than they would with traditional student loans.

The Trump administration has said that it plans a federal experiment offering income share agreements to students. This prompted a letter earlier this year to Education Secretary Betsy DeVos from Democrats Sen. Elizabeth Warren, Rep. Ayanna Pressley and Rep. Katie Porter,

With income share agreements, there’s the “danger of deceptive rhetoric and marketing that obscure their true nature,” lawmakers wrote in the letter. They said it’s “deeply disturbing to see a department official boosting novel forms of student debt instead of trying to stem the tide of indebtedness.”