United States: Student loans: ISA option

EducationWorld May 2019 | International News

As total student debt in the US reaches $1.5 trillion (Rs.104 lakh crore), policymakers and private lenders — as well as universities — are increasingly turning to income-based repayment as a potential solution. The model ties repayments to salaries for a fixed term and is seen as a way of preventing borrowers from owing more than they earn. But advocacy groups are warning that the private versions may offer students little relief and greatly increase their long-term costs. “It’s a little overbearing to use (the term) ‘indentured servitude’,” says Jessica Thompson, director of policy and planning at the Institute for College Access & Success, “but it’s a little bit more like that model.”

That’s because the private offering — known as an income share agreement (ISA) — has no principal balance or interest. Instead, the student agrees to pay the private investor or the institution a certain percentage of his or her salary for a set period of time after graduation.

Mark Takano, chair of the House Committee on Veterans’ Affairs, told a recent congressional hearing that the history of private market abuses in college financing leaves him worried about ISAs. “Speaking frankly,” says Takano, “I see ISAs as another way to push the private market on to students, which has never resulted in positive outcomes.”

The emerging controversy stands in contrast to the bipartisan backing for various forms of income-based repayment run by the federal government. There are now a half-dozen such federal programmes dating back as far as the George W. Bush administration, including models created by Congress and the Obama administration. Donald Trump endorsed ISAs as a presidential candidate, and all three of his administration’s annual budget proposals have included them. About 7 million US students now participate in government ISA programmes and student advocacy groups consider the biggest problem with them to be the relative lack of their use and awareness of their benefits.

In addition to offering lower costs than private models, says Thompson, federal income-based repayment programmes offered full forgiveness after the borrower has been paying for a certain number of years. “Pretty much there’s widespread support for the concept of the federal income-driven repayment plan,” she says.

Yet the private options are steadily growing, with providers describing their products as a useful addition that can offer better long-term outcomes. Lenders include Lumni, Upstart and Vemo. Popular targets are students in short-term courses such as computer-coding boot camps. But some higher education institutions are offering their own products, including Purdue, Clarkson and Norwich universities, and Allan Hancock and Lackawanna colleges.

(Excerpted and adapted from The Economist and Times Higher Education)

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