Two major groups within the financial industry began the month of March with renewed advocacy for structural modifications to the student loan program managed by the U.S. Department of Education, which currently issues about 90% of student loans.
First, in early March, the Consumer Bankers Association, a trade organization representing financial institutions offering retail lending products and services, issued a press release renewing a campaign for the institution of student loan caps on individual graduate students and parents of undergraduates.
This position was not a novel one. In fact, in critiquing the Higher Education Act reauthorization bill introduced last December, the CBA had pushed for the same elimination of graduate PLUS loans and caps on parent loans. Only such removal, the CBA argued, would check college tuition costs by controlling colleges’ access to federal funds through student loans, as these caps too often “crowd … out the private market and limit … options for families.”
The Federal Reserve Bank of New York agreed that there was a correlation between federal lending and the cost of college. In one study, that institution concluded that every dollar increase in federal loans adds between $0.25 and $0.63 to the price of tuition. Additionally, in a 2016 working paper, researchers from the National Bureau of Economic Research similarly faulted tuition increases based on the belief that students could cover rising costs through more federally-backed borrowing.
Second, around the same time, a group of investors began lobbying for legislation to provide a clearer legal framework for “income-share agreements.” Conceived by Milton Friedman in 1955, Oregon legislators first codified ISAs in 2013 when they passed “Pay It Forward,” a bill authorizing a state-funded ISA for students attending Oregon public universities. ISAs were further popularized in 2016 by former Indiana governor and current Purdue University president Mitch Daniels. A description of the Purdue program can be found here and here.
The typical ISA allows private investors to provide money upfront to cover tuition in exchange for a portion of a student’s income following completion of their studies. In effect, ISAs allow students to sell “shares” of their future earnings. Because ISA contracts are by definition income-based, they can be an attractive alternative to other forms of student loans, especially private loans.
With student loan debt now exceeding $1.4 trillion, dethroning auto loans and credit cards as the second largest source of household debt in the United States this year, the marketplace for ISAs had grown increasingly crowded. Providers like Lumni, Upstart, and Venmo have begun to pitch their own take on these arrangements. Some of these entities offer aid for non-institutional providers, such as coding boot camps, while others focus on students in traditional higher education programs. For example, Lumni, a for-profit firm that offers ISAs throughout South America, has inked contracts with over 7,000 students since 2002 and realizes a 10-15% rate of return.
Though supported by the New America Foundation and the American Enterprise Institute, the two bills introduced in 2017 in Congress to formally recognize and regulate ISAs did not make it out of committee. The same was true for predecessor bills in 2014 and 2015.