Income Share Agreement a Better Substitute for Student Loans [Report]
The federal government should substitute the federal student loan programs with Income-share agreements (ISA), a new Manhattan Institute report has recommended.
According to the report by expert Jason Delisle, the current federal student loan program unequally distributes the benefits and fails to offer protections for borrowers in financial difficulty. On the other hand, ISA provides adequate resources for borrowers and relieves students of the financial hardship perpetuated by student loans.
The institute shared a blueprint of how the ISA model would make student debt affordable and equitable. It recommended establishing a single $50,000 line of credit, in which for every $10,000 student borrow, they would repay at a rate of 1 percent of their income. Borrowers who use the whole line of credit would repay 5 percent of their earnings for the first 25 years after leaving school.
“Charging interest works poorly in the current system because borrowers who do sign up for today’s IBR program often make monthly payments that are less than their accruing interest when their income is low relative to their debts. While the borrowers remain current on their obligations, they may be demoralized as they watch their balances grow month after month,” the report stated.
The proposed plan exempts low-income borrowers from making payments if they earn too little to file a federal tax return or qualify for the Earned Income Tax Credit (EITC). The individuals earning $12,000 or less are generally not required to file a tax return.
The report recommends new accountability measures for colleges, which include replacing the current measure of disallowing schools with high default rates from participating in the student loan program with a new measure that would unleash penalties if three years after entering repayment a cohort has repaid less than 5 percent of the original disbursement.
“These penalties could be a form of risk-sharing payments that the school makes to the federal government or revocation of a college’s eligibility to participate in the federal program,” the report said.
Last week, four senators led by Todd Young introduced the ISA Student Protection Act that would bring income share agreements under federal consumer protection laws and give the Consumer Financial Protection Bureau oversight authority.
It would exempt students from making payments towards the agreement if they earn less than 200 percent of the federal poverty level. It would also bar ISA providers from making agreements with students where the required payments would be higher than 20 percent of their income for shorter-term contracts.
Lately, many colleges and universities across the nation have begun offering ISAs to their students instead of traditional student loans. Norwich University, Colorado Mountain College, University of Utah and the University of California San Diego Extension are few of the schools that have introduced ISAs.