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Income share agreement


Conservatives should have sympathy for millennial borrowers, who did everything their parents and culture told them to do to be successful, only to become the most debt-laden generation in history. Countering a culture of credentialism mania with apprenticeships and trade alternatives is a positive step, but the first rule of finding yourself in a hole should be to stop digging. There’s no reason for the average American to subsidize the elite sorting mechanism universities have become.
► Inez Feltscher Stepman

No, it’s not another term for “marriage,” though that does offer an indication of just how involved this can get.

The use of “share” and “agreement” give the phrase an uplifting, almost cheery, sound, but the underlying consideration here is debt – the mountains of nearly unpayable debt not all but many college students face. After mortgages (which most of the time are a manageable and ordinary part of middle-class living), the largest mass of debt in the United States is higher education debt, more than $1.5 trillion. In many cases that debt is in such large amounts that final payoffs of them seem unseeably far into the future.

This is a new development. During my college days in the 1970s, I took out a couple of student loans, but they were small, and I paid them off without difficulty in four or five years. The loans were small because the costs were too. Finances were not a reason, in those days, a person could not go to college (at least, some decent college) if they chose to.

Conditions have changed. The situation is not good for anyone involved, but especially for those buried under all this debt. One theoretical advantage in a search for solutions is that, increasingly, student debt is not scattered among endless numbers of private lenders but under the umbrella of the federal government; the advantage is not that the federal government is any better as a lender but that it is just one unit to deal with,k and susceptible to congressional action.

One approach for dealing with it, a method that seems to be gaining in popularity, is the “income share agreement,” which is a variation on how a loan will be repaid. Instead of imposing a set amount due every month (depending presumably in part on the size of the loan), the ISA is more flexible: It would vary in size depending on he income the former student receives once employed. A law student who goes to work for a top white-shoe firm might kick in more, while one who works as a public defender might pay less. An in-demand physician would may more dollars per month than, say, an elementary school teacher.

The idea has some appeal (which is about 40 years old), as a way of matching ability to pay with liability. But the story could get more complicated. The debt size in many cases is so enormous that it might not plausibly be repaid in a working lifetime – and what then? (The law is very hard on discharging student loans, albeit not impossible under some conditions.)

That’s only one of the questions.

There’s a financial-structural question, which is beginning to arise as private lenders gradually move back into the business. As writer Malcolm Harris put it, “If you can convince investors you’re going to be rich for the rest of your life, why spend your college years poor?

I.S.A.s bridge the gap. It’s hard to think up a better advertisement for free-market capitalism. But I.S.A.s are premised on the idea of discriminating among individuals. Once the high-achieving poor and working-class students have been nabbed by I.S.A.s, the default rate for federal loans starts to rise, which means the interest rates for these loans have to go up to compensate. A two-tiered borrowing system emerges, and the public half degrades.”

This leads to developments that could even “reshape childhood,” encouraging K-12 students to redraw their K-12 learning and activities to suit not only college admissions offices but also lenders – to persuade that they’d be a good lending risk.

The ongoing steps where this might lead – not least in the discouraging of students even thinking about entering much-needed but less-profitable careers – could take a dark path.

University of Chicago economist Gary Becker said in one study that “Economists have long emphasized that it is difficult to borrow funds to invest in human capital because such capital cannot be offered as collateral and courts have frowned on contracts which even indirectly suggest involuntary servitude.” But under enough financial pressure – we’re talking about really big money here, past the trillion-dollar mark – how long will courts continue to look at it that way?

Which takes us back to “share” and “agreement,” and the question of how such a fine-sounding concept can turn into something so dark.

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