Mitch Daniels Looks to the Private Sector to Alleviate Student Loans

The Purdue University president and former Indiana governor proposes selling shares of students’ future income.

Former Indiana Gov. Mitch Daniels leaves the White House.
National Journal
Aug. 18, 2015, 9:35 a.m.

With stu­dent loan debt rising and the threat of new edu­ca­tion mod­els loom­ing, Purdue Uni­versity wants to of­fer a very dif­fer­ent way for stu­dents to pay for school: private in­vestors will fund their edu­ca­tion, and get paid back as a por­tion of the stu­dents’ fu­ture in­come. It’s called an In­come Share Agree­ment (ISA)—if stu­dents earn more than ex­pec­ted after uni­versity, they pay back more; if they earn less, they pay less.

It’s something that’s been avail­able on the private mar­ket through star­tups like Pave and Lumni, and from some non­profits. But Purdue would be a pi­on­eer among ma­jor pub­lic uni­versit­ies if it act­ively of­fers ISAs as an op­tion, which it’s aim­ing to do start­ing with stu­dents who ma­tric­u­late in the spring of 2016.

It’s a pet pro­ject of Purdue pres­id­ent (and former gov­ernor of In­di­ana) Mitch Daniels, who test­i­fied in sup­port of ISAs be­fore the US Con­gress earli­er this year.

“This no-debt, low-risk op­tion is an­oth­er way we can help keep our land-grant school with­in fin­an­cial reach of all qual­i­fied stu­dents,” Daniels said in a press re­lease. Stu­dents would be able to de­fer pay­ment for years if they don’t reach a cer­tain in­come threshold.

Pro­ponents of ISAs (pay­wall) be­lieve they are the fu­ture of edu­ca­tion fin­an­cing—al­though they have a long the­or­et­ic­al his­tory. Eco­nom­ist Milton Fried­man laid out the ba­sics in a 1954 book. ISA boost­ers ar­gue that the cur­rent sys­tem of stu­dent loans can be un­ne­ces­sar­ily bur­den­some, and con­trib­utes to the ever-rising cost of an edu­ca­tion. ISAs, they ar­gue, have the po­ten­tial to be fairer for stu­dents, and re­duce the price of edu­ca­tion over time. Ul­ti­mately, ISAs could en­able stu­dents to take big­ger ca­reer risks.

ISAs cur­rently ex­ist in something of a leg­al wil­der­ness—Up­start, one of the first star­tups to of­fer ISAs, gave up on them last year, blam­ing the reg­u­lat­ory en­vir­on­ment—but there is le­gis­la­tion pending in Con­gress that would build a reg­u­lat­ory frame­work around the idea. The bill would set caps on things like the per­cent­age of in­come col­lec­ted and the time frame of the agree­ments.

They would po­ten­tially bring soph­ist­ic­ated fin­an­cial tools to the field of cus­tom­ized stu­dent loans, as com­pan­ies use al­gorithms that try to pre­dict stu­dent po­ten­tial in an at­tempt to earn a re­turn for in­vestors.

De­tract­ors ar­gue that these pro­grams amount to mak­ing of­ten low in­come stu­dents “in­den­ture them­selves to pat­rons in the in­vestor class,” as Kev­in Roose wrote for New York Magazine, with a stark power dif­fer­en­tial that could leave stu­dents at a dis­ad­vant­age. The pro­grams may also end up fa­vor­ing people who come from high­er so­cioeco­nom­ic back­grounds and who are ac­cep­ted in­to cer­tain ma­jors at elite in­sti­tu­tions, cre­at­ing a self-re­in­for­cing cycle that ex­acer­bates in­come in­equal­ity.

There’s also a po­ten­tial ad­verse se­lec­tion prob­lem: Stu­dents that ex­pect to earn more may avoid these plans, since they could end up ul­ti­mately pay­ing more than with tra­di­tion­al flat-fee tu­ition.

Purdue still has to se­lect a part­ner to of­fer the ISAs it is plan­ning. Its stu­dents already have the op­tion to pay back stand­ard loans as a per­cent­age of in­come, but very few take it, and na­tion­wide very few have chosen to enter ISAs yet. But de­pend­ing on the suc­cess of Purdue’s ef­forts, this might be the push that ad­voc­ates for this new mod­el have been wait­ing for.

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