ISAs Demystified: 9 Facts about Income Share Agreements

1. They Aren't the Bogeyman

Paying for school can be a huge hassle, especially when the bank bans you from showing up with a dump truck full of pennies. Do they know how hard it is to borrow a dump truck on short notice?

Anyway, if you've been doing your homework on college finance, you might have come across this delightful little phrase: income share agreement. Street name: ISA. We're here to give you the lowdown on this unorthodox, yet increasingly popular, student loan alternative. Don't worry, you can thank us later.

Our first pro tip is simply this: don't believe all the hype. ISAs aren't all good or all bad. You knew that already though, right? You're one of those Shmoop-born-and-bred critical thinkers.

2. They Are Basically Selling Personal Stock

The ISA was the brainchild of Milton Friedman, who proposed a method of selling personal stock.

To be brief, ISA = being paid money upfront for offering a share of your future earnings to investors.

In most cases, the money for an ISA will go toward a student's education. But if we'd known about this concept earlier, we would have charged our entire childhood against our earning potential.

3. Repayments Vary Significantly, Unlike Student Loans

You can enter into an ISA with the government or with a private institution. You're paid a fixed amount, but what you repay is contingent on how much you earn afterward.

The main difference between an ISA and a traditional loan is that loan repayment amounts are paid back in fixed sums, while ISA repayments can vary significantly.

Pretty simple stuff...unlike holiday gift wrapping. We still get nightmares from the ribbon fiasco of 2008.

4. If You Earn Less, You Pay Less

An ISA is like a kind of insurance against poor return on your educational investment. If you end up earning less, then your education will have cost you less because the amount you repay will also be smaller. Excellent.

Bonus: if you manage to cover all of your educational expenses through ISAs, then you won't have to deal with student loans at all. We especially recommend that you steer clear of private student loans, which have notoriously steep interest rates. In fact, you might want to practice affecting sympathy for when your friends tell you their Sallie Mae horror stories.

Trust us, they're not pretty.

5. They're Gaining Popularity

Right now, ISAs are mostly used to fund students' attendance to trade schools and non-profits (source). However, as the student loan debt crisis escalates to Godzilla-like proportions, ISAs are gaining traction.

Some young people attending traditional, four-year universities are now turning to ISAs as a viable alternative to student loans.

ISAs can also be useful for non-students looking to collect investors. Now you know where to turn when you're finally ready to launch that pancake house-come-nightclub. Such a good idea.

6. You Have Options for Lendors

Wait, you mean money doesn't just fall out of the sky once you decide to go to college? Unfortunately not, our optimistic friend.

Web-based funding companies like Pave, Upstart, and Lumni connect students with potential investors. Looking into these options might save you some cash.

States are even getting in on the action these days. Oregon's "Pay It Forward" legislation allows students to attend college "for free"...while agreeing to pay a portion of their future income back to the state after they start work.

With all of these options at your fingertips, we won't blame you if you start to feel like the most popular kid in school.

7. Repayment Time Averages 10 Years

You know when you bump into your crush in public and you haven't showered or changed out of sweatpants in days? We know that feeling. Repaying your debt can be just like that.

Luckily, knowing the facts can help alleviate some of the awkwardness. The average repayment period for private ISAs is about ten years. During that time, you'll be expected to fork over about 3% of your income. Or, you can opt to bite the bullet and shell out 6% over a five-year period.

That's a significant chunk of your income, no doubt. But the average person takes twenty years to repay student loans, so you should at least consider all of your options. After all, who wants to be repaying loans until they're a hundred years old? Not us.

8. Institutions Offering ISAs Target Students Who Will Succeed

It's not all gumdrops and candy-filled trees, though. (Sidebar: wouldn't that be kind of awesome?) ISAs are still an investment platform. They are intended to recoup whatever money is spent on a student.

This means they might not be available to students majoring in fields that traditionally provide low return on investments. Similarly, ISA companies assess the future earning potential of students and specifically target those who might earn a higher income after graduation.

Sure, that seems a little exploitative, but don't take it personally, Shmoopers. It's just business.

 9. They Are Not A One-Size-Fits-All Solution

An ISA is just one tool in your college finance arsenal. However you decide to fund your education, we do suggest that you try to avoid paying off your college education 'til you die.

There are plenty of creative ways to reduce the sticker price of school...and we happen to know about some of them. No need to thank us. What are friends for?

To view the original article from click here.

ALU founder: Tertiary institutions must break the classroom-workplace barrier

African Leadership University is the latest entrant into Rwanda’s higher learning sub-sector. The university with its headquarters in Mauritius is aiming at boosting the quality of tertiary education and equip its graduates with job-relevant and leadership skills.

The institution aims at offering university education which rivals world class institutions but with an African context and relevance.

The New Times’ Collins Mwai had an interview with Fred Swaniker, the founder of the institution to understand the planned roadmap of the institution in Rwanda and East Africa.


Last year, ALU set up a campus in Kigali, amid what some say is a crowded space in terms of higher learning institutions. What informed the move?

It is the ease of doing business. Rwanda has an efficient government with forward looking policies that encourage innovation. Government institutions such as Rwanda Development Board and Higher Education Council are efficient, professional and receptive to innovation.

We were inspired by the country’s vision and progressive thinking, its emphasis on education and technology, and we wanted to play a role in it.

Our vision as ALU is to create leaders that will build an ‘Africa that works’. Rwanda is an excellent place for Africans to see this in practice. Kigali offers a safe and secure environment for international students. It gives parents the peace of mind and confidence that their children will be safe at studying at ALU in Kigali.

Rwanda has excellent infrastructure. Arriving in the city is seamless and possible from a number of African countries through RwandAir. The immigration regime is very friendly to African students and visitors. Most of them can apply for a visa on arrival. This is something we have found particularly important for students in our MBA programme at the ALU School of Business who need to travel into and out of Rwanda for short periods of time.

Kigali has also given us the facilities we need to succeed as an organisation. There is fast and reliable internet access, something particularly important for teaching and learning at ALU. We have found an excellent home at Kigali Heights, which has world-class facilities.

This is where we will be running the majority of our classes for the next 18-24 months while we are building our long-term campus in Kigali Innovation City. The same is true of the Kigali Convention Centre where we have held key events and held sessions for our MBA programme.

Are there any avenues of cooperation and partnership with local higher learning institutions to boost their capacities?

We are very excited to be a part of the Rwandan tertiary education eco-system. One thing we really look forward to is collaborating with local institutions, particularly the University of Rwanda.

We envision sharing our knowledge and ideas around entrepreneurship, leadership and skills-based learning as well as opening up our doors to all members of the Rwandan university community through a public lecture series that we hope to launch soon and a student exchange programme.

We want to be part of Rwanda’s development. We want to complement the work already being done by higher education institutions in Rwanda.

Most African universities continue to use old curricula and courses to train students which has partly contributed to the mismatch between labour market and job seekers. How is ALU trying to get past this?

In our approach to education, we are focused on ensuring our students do not just learn theory, but also graduate with the set of skills needed by employers. These are skills like critical thinking, leadership, communication, entrepreneurial thinking, project management, and how to use data to make decisions.

All students are given these skills in their first year at ALU, irrespective of what their academic specialty is.

A key part of ALU’s curriculum is the real-world projects we give our students to work on, from their first month on campus. All students also have to undertake a mandatory 4-month internship every year, where they get to acquire practical work experience with various organizations.

This means that each student is expected to graduate with one year of work experience already under their belt.

The whole idea is to break the barrier between the classroom and the workplace. Learning should allow students to understand how ideas work in practice.

Quality education often comes at a high cost, which locks out students who cannot afford it…

Yes, indeed, quality of education is costly, but it can be made affordable. At ALU, we have a unique system of student financing called the Income Sharing Agreement (ISA). We give students funding for all or part of their education according to their needs and irrespective of their background.

When the student graduates and gets a job, they then pay a fixed percentage of their income, (regardless of what they earn), for a fixed period of time (usually ten years) back to the investors who provided the funding.

ISAs are a way for private markets to directly finance tertiary education. This way, even students that would have forfeited university education because of costs can afford to get an education.

The ISAs available at ALU are financed by an independent company known as the African Leadership Finance Corporation (ALFC) which pools investor capital to provide African students with much needed education financing.

In Rwanda and the East African region there has been little or no input by universities to policy making through research, how can this be turned around?

I think above all, research, especially in the African context, would need to be a collaborative effort.

However, I cannot speak authoritatively on the intricacies of the link between university research and public policy in East Africa.

There have been complaints that most graduates from local institutions only have technical skills but fall short in terms of business acumen, which hinders them from making the most out of their skills, what’s ALU’s approach to address this?

Our approach to education is fundamentally hinged on skills-based learning. We focus on cultivating critical thinking and problem solving skills in our students, rather than memorising facts and figures.

We have a very hands-on approach to running our classes. Our students are encouraged to develop new ways of thinking and knowledge application through activities and challenges.

Further to that, one of our core beliefs is that the purpose of a higher education should be to help students ‘learn how to learn’. That is, we need to encourage a habit of lifelong learning where students embrace the notion of ‘just-in-time’ learning, which will allow them to continuously brush up on critical skills as they need it once in the workplace.

The prevailing mode of teaching is the opposite - a ‘just-in-case’ model where knowledge is acquired based on a pre-set curriculum and may depreciate if not applied immediately.

We want to foster in our graduates an insatiable passion to learn, so that they keep reinventing themselves and as a result, continue to be relevant in an ever-changing labour market.

Internships have been said to have not much effect on the student’s academic development, what model would you recommend if internships are to have a greater impact?

We believe that the best way to prepare our students for the world of tomorrow is to break the barriers between the classroom and the workplace. We do this by deliberately embedding real world challenges and tasks into our curriculum.

For example, students spend a big part of their first year learning how to create, plan and pitch a project that speaks to the challenges that major corporations, like IBM, already face. This is immediately put to work.

All students are required to take on internships for at least 4 months each year as part of their graduation requirement. This means they will graduate with 1 full year of work experience, and be ready to ‘hit the ground running’ when they enter full time employment.

We have a career development team that works with them to secure these work placements. We recommend that every student at every university finds a way to do an internship during their university programme.

The idea of the internship is to allow students to understand how the world of work works and how ideas take shape in a practical environment. The model that we employ at ALU maximises the internship period, making it a focal point of their academic career rather than a ‘nice to have’. It will help address the issue of ‘unemployability’ that is caused by misalignment of education with hard skills the market needs.

What would you say are characteristics of ALU graduates?

We are yet to graduate our first class. However, I can tell you about the kind of student we have already enrolled at ALU.

Our students have a very distinct sense of initiative fostered through entrepreneurial thinking and leadership opportunities. Some of them have started their own for-profit ventures, non-profit organizations, and they have pioneered on-campus traditions like our all community Assembly, our Arts Festival and so many other things. In general, they tend to ‘think outside the box’, and are very creative and innovative individuals.

They also have academic initiative. We actively encourage our students to embrace a culture of lifelong education. They have platforms at their disposal that enables them to readily access information, allowing them to take charge of their own education, at their own pace and in their learning style.

Our students are citizens of Africa and citizens of the world. They are change-makers. They are curious about the world around them and they seek to make it better. I am very positive that they will achieve even greater things when they graduate.

To view the original article from The New York Times click here.

Fred Swaniker, African Leadership University

Education is the way to secure Africa’s next generation of great leaders, according to Fred Swaniker, co-founder of the African Leadership University. He shares his vision for the institution and internationalisation in African higher education as well as why he’s so eager to visit Denmark.

The PIE: Tell me your genesis story, how did ALU start?

FS: ALU is really an outgrowth of other work I have been doing in education for the last 15 years. I grew up all across Africa, I was born in Ghana but I left when I was four, and then every four years of my life I moved to a new country in Africa. That gave me a big passion for the continent and also gave me a perspective across all countries, not just the country I was from.

I came to see that Africa has tremendous potential, but we are being held back by the quality of our leaders. But I didn’t know how we would address this particular issue. I went to college in the States and joined McKinsey for a couple of years and then I went back to business school. While I was there I was reflecting on my experiences on the continent and this question of leadership. I started thinking ‘do we just sit back and hope that Africa gets good leaders by chance or can we find a systematic way to develop it?’.

That is what gave me the idea to start a school to train leaders and use my family’s expertise in education and my early experience in building education ventures be able to have education be the vehicle to solve it.

“I thought ‘why don’t we have world-class universities on the continent that students can go to?”

That’s how I started the African Leadership Academy in Johannesburg. It’s a two year pre-university program. They do A-levels, they do a special curriculum where we offer entrepreneur leadership and African studies. Over the years that institution has had about 1,000 young people come through it from all across Africa and 80% of those students will go to college in the States. That bothered me. I thought ‘why don’t we have world-class universities on the continent that they can go to?’.

The other thing I was worried about was that we get 1,000 applications to that academy but we can only take 100. I realised we needed to do something at the tertiary level and we needed to do that on a larger scale.

Along the way of building the academy I also started Global Leadership Adventures, which is a summer program which teaches leadership skills to young people all around the world. We started that program with 70 students in Cape Town in 2005 and this year we took 3,000 students across 20 locations in 14 countries in Latin America, Africa and Asia. So essentially now in establishing ALU, I am bringing the experience of establishing Global Leadership Adventures and opening that in multiple sites around the world and the experience of starting the academy.

The PIE: The curriculum you’ve developed is quite unique. How did that concept begin?

FS: Previously, education was about learning a lot of facts and figures, what I call ‘just in case’ education, in case it becomes relevant to something in your life. And what I really believe is in the 21st century it’s ‘just in time’ education – where you learn how to learn and actually acquire skills that will always endure with you.

We wanted to provide students with that knowledge, character and skills for the 21st century, so we did research with about 150 employers around the world asking them what are the skills they typically find missing in college graduates and identified what we call seven ‘meta-skills’ and these are skills like critical thinking, analytical reasoning, leading yourself, leading others, managing projects etc.

We then mapped out five sub-skills for each of these seven skills and came up with 135 learning outcomes for the foundation core curriculum. We then said every student has to have these skills in their first year.

Then in their second, third or fourth year they are doing something technical like engineering, where they do all that deep intellectual, rigorous work you would see at any other university. Instead of declaring a major, we ask them to declare a mission for their life and then they get to curate their own learning around that problem.

Then they go into mandatory internships for four months, where they are getting to practice what they are learning to solve problems in the real world. So that is how we approach it – aligning education with a purpose. If you can give the students a chance to define their own mission then that would allow them to align their education with a purpose.

The PIE: So your students don’t declare majors?

FS: Traditionally universities have schools that are built in silos, the school of business, school of law, school of engineering, etc. but we think in order to solve the world’s greatest problems you need to adopt a much more interdisciplinary approach. We created our schools around seven grand challenges that Africa is going to face in the next 50 years and seven great opportunities. The challenges are things that if Africa doesn’t address we are going to be in really serious trouble.

Things like urbanisation, there are 800 million people moving to cities in the next four years, how do you prepare for that? So the School of Urbanisation will study architecture, civil engineering, urban planning, how to use technology to build smart cities, etc.

Other big challenges are climate change, infrastructure, healthcare, education, job creation and governance and so these are all interdisciplinary schools where an entire knowledge base and research that needs to be done to solve those problems will come together.

The PIE: Tell me about the income sharing model you have for tuition.  

FS: When we looked at the situation, we realised the four traditional funding models probably wouldn’t work in Africa.  Governments don’t have the funding in Africa, they are cash strapped enough to provide basic primary and secondary education. Most African families can’t afford to pay fees. Private financial institutions, if you look at the US student loan, it has become a noose around peoples’ necks, people are being forced to make wrong careers choices because they have to pay back student loans, it really restricts the freedom of students and we don’t want to go down that route. And then the fourth option of philanthropy might work for a limited set of students but not on the scale we are doing it.

So we decided to try an alternative model, like how they do it in Australia – income sharing arrangements where we will provide finance to students and when they graduate they pay back a share of the income for a defined period. Instead of it being a fixed amount they need to pay with interest you would get from a loan, they commit to paying back a fixed percentage of their income, let’s say 7-10% for 10 years and then they are done. Whether what they pay back covered the amount they got is irrelevant. After 10 years they are done. That gives the students a lot more flexibility and it allows everyone’s repayments to adjust to what they can afford to pay.

Ultimately, we want the students to see it as them contributing towards their education and the next generation’s education. We want to really tie it in to the ethos of the university and get them to see that when they are contributing, they are actually helping the next generation. We are even considering naming a scholarship after every graduate so that when you pay back you know you are funding these two students.

The PIE: How do you plan to go global?  

FS: As much as we are trying to be innovative with ALU we don’t want to reinvent the wheel, so there are many great things that universities around the world have done and we want to learn from them.

We want to establish links with the world’s greatest universities, and have faculty exchanges. We hope that we will have faculty from all around the world spending time on our campus, for as short as a week doing a short seminar or for an entire year, rotating through all the time. Especially if they have expertise in some of the grand challenges and some of things we are trying to address.

We also would like to be able to send some of our students to spend time at other universities around the world and to contribute towards student life and intellectual dialogue on those campuses. We would be interested in collaborations with 2+1 or 2 +2 degrees.

We also would be interested in curricula exchanges, because in terms of not reinventing the wheel, we want to bring together great curricula from all around the world from great places, for example, when we designed executive MBA for participants across Africa using online curriculum from Harvard Business School and Wharton.

We have partnered with all these different institutions and it has given our MBA students a world class curriculum. We don’t claim to be the experts in all the fields, we want to collaborate with experts in different fields and bring them all into one place, on one campus and give our students access to this plethora of knowledge that has been developed in other universities around the world.

The PIE: You have a campus in Rwanda and Mauritius, are you planning on opening more campuses?

FS: Our original plan was to open 25 campuses in Africa. There are 52 cities in Africa with a population of more than one million, so we expect to establish ourselves in 25 of these cities. But I wouldn’t rule out opening a campus outside of Africa either.

The PIE:  What does internationalisation of education look like in the African century?

FS: I think it looks like, one, African born institutions becoming some of the most prestigious universities in the world. Because we don’t have the constraints of legacy, a lot of the innovation in education will come out of Africa and some of the world’s greatest universities, by the end of this century, will be African universities that were born in this time of innovation and disruption to higher education.

Another thing I could see is that some of these African universities are opening campuses in other parts of the world. You might have an ALU in Spain or something like that, so I can see that trend happening. I could also see some interesting collaborations happening with global universities and African universities, the innovation that is happening in African universities will be transmitted to more established universities and vice versa. It will take a while but I think that Africa is fertile ground for innovation.

The PIE: Is there a specific African approach to higher education that hasn’t been done by Europeans, Brits or Americans? 

FS: I wouldn’t say it is specific to Africa but I think Africa has an environment that allows innovation to happen because there is such need. Tertiary enrolment rates in Africa are only 8%, in India it’s about 24%, Europe and the US it’s about 60-70%. So just to catch up to India’s level of tertiary enrolment we would need to build 135 universities the size of Harvard every single year for the next 15 years. When you are in that kind of environment, you can’t do things the normal way. To catch up means to completely rethink higher education so that you have models that are more efficient, more effective and much more affordable.

We have no other choice but to innovate because we don’t have the time to go through 300 years of building institutions. We don’t have the resources to do it, we cannot afford to price it at $50,000. Many of these innovations are actually coming from other parts of the world but it is harder to implement because of the tradition of inertia and status quo. It is very similar to when the mobile phone came out, it was not developed in Africa but many of the innovations in mobile technology actually happened faster in Africa and I think we have the same opportunity in education.

The PIE: You have a well-known story which is entrenched in the origins of your university. But I would like to hear something that people might not already know about you.

FS: I don’t get stressed very often. I love pets. I have an Italian greyhound, his name is Iggy, he lives with me in Mauritius with my wife who is from California.

I consider myself a bit of a foodie. I like going on food vacations. Cape Town has some of the world’s best restaurants. I would love to do something in Copenhagen, because my last name is Danish.

The PIE: How did that happen?

FS: Ghana was colonised for a brief period by the Danes, so my great, great grandfather was the last Danish governor of Ghana. He actually wrote down a list of names that he wanted his descendants to be called and Frederick was on that list. My brother’s name is Johan. I have a nephew whose name is Ludvik. That must have been a trendy name in the 1800s

To view the original article posted in  Pie chat click here.

Investors are paying college students' tuition — but they want a share of future income in return

Income-share agreements are an interesting alternative to loans to pay for college.

Melissa Gillbanks is no fan of student loans, so when she was looking for a way to pay for her senior year at Purdue University, she was happy to sign away a portion of her future income in exchange for a very different way to raise cash for college.

"When I found out there was a way to pay for my education that couldn't potentially haunt me for life and rack up debt, I immediately told my father," Gillbanks said.

Gillbanks decided she would finance part of her last year of school with something called an income-share agreement.

Under the plan, the Purdue Research Foundation, the body that manages the university's endowment, in cooperation with some private investment firms, has fronted Melissa's tuition money under the condition that she will surrender a percentage of her future income for a given time after she graduates.

Compared to loans, income-share agreements today have a minuscule market as only a couple of thousand students are using them to pay for college. But many advocates of ISAs think this financing method has the potential to become a lot more popular.

What are income-share agreements, and how do they work?

With traditional student loans, lenders provide students money. After they graduate, they pay back the loan plus interest in monthly payments spread over years and decades.

ISAs are different. It's not even a form of debt. Instead, investors such as private investment firms or a college endowment pay for students' tuition. Then, when the students enter the workforce, they surrender a percentage of their post-college salaries for a time, generally no more than 10 years.

If graduates get good jobs with nice salaries, those investors can make out quite nicely. They could earn as much as 2.5 times the amount they provided the student. But investors also assume the risk that the graduates could end up at low-paying jobs or, worse, unemployed.

In that sense, it's kind of like venture capital for college students. If they do well, the investors do well, but both sides have risk. And since it is the universities that are forking over the bulk of the financing for ISAs, they have an extra incentive to ensure that their product — a four-year college education — is valuable.

"It is a very interesting alternative because it is predicated on expected future income of students and their success," Tonio DeSorrento told Business Insider.

"It doesn't look at the asset value, wealth, income level, or the student or his parents.

It is truly based on expected outcomes."

DeSorrento is the CEO of Vemo Education, the Virginia-based firm behind a number of ISA programs at colleges and coding schools in the US. Essentially, Vemo provides the infrastructure for higher-education institutions to implement ISA programs. Tonio DeSorrento wouldn't disclose the clients his firm is working with, but he does predict that dozens of schools will hop on the ISA bandwagon in the coming years. Last year, Vemo was among the partners that played a role in launching Purdue University's ISA program, one of the most prominent in the US.

The success of Purdue's program may determine whether other schools follow their lead and adopt similar programs, according to Charles Trafton, the head of FlowPoint Capital, an investment firm in Massachusetts. He told Business Insider that his firm was working on buying up $4 million worth of ISAs.

"Right now, the market for ISA is only $20 million," Trafton said. "It could easily be $1 billion in the next 5 years."

A possible solution to America's mounting student-loan problem:

The amount of student-loan debt owed by Americans soared from $150 billion to $1.3 trillion from 2009 to 2017. And not only is student-loan debt increasing, but it's increasing at a faster rate than wage growth. By 2023, the average BA grad's debt load will exceed his or her annual wages.

This is already having negative consequences across the economy.

As reported by Business Insider's Akin Oyedele, the rising cost of higher education and borrowing to finance it means that people who take on debt are likely to achieve homeownership — defined as having a mortgage any time before age 30 — later in their lives.

Because ISAs are based on a person's income, while a student may end up paying more under the conditions of an ISA, they will never, in theory, pay more than they can afford.

The history of ISAs

Income-share agreements may just be picking up steam, but they are not a new concept. In fact, they were introduced in 1955 by the 20th-century economist Milton Friedman in "The Role of Government in Education" (PDF).

Friedman wrote:

"[Investors] could 'buy' a share in an individual’s earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his original investment from the unsuccessful."

A modified version of Friedman's original idea was implemented at Yale University in the 1970s, but it ended in "utter disaster" because it was done on a cohort basis, meaning that the ISAs had to be paid off as a group. Some ended up paying longer than they had expected while they waited for their peers to finish their payments. Ben Miller, the senior director for postsecondary education at the Center for American Progress, told The Atlantic:

“Everyone had to pay back until the cohort paid back everything.”

Because individual students were allowed to pay back the amount each had agreed to early while the cohort overall was required to meet a set target for investors, high-earners prepaid early, low-earners skated, and middle-earners were saddled with the burden of paying back investors.

According to Charlie Trafton, income-share agreements that share some similarities with Purdue's ISA model began popping up in Silicon Valley as a solution to the skills gap.

"There's been a huge mismatch in Silicon Valley between the skills people have and the jobs that are available," Trafton said.

"So what you had were a lot of these venture capital firms starting up these coding academies that essentially charge no tuition and students give a percentage of their income once they got jobs."

On the policy front, ISAs have been gaining some traction among some top lawmakers.

One longtime advocate of ISAs is a familiar face from the 2016 presidential election — Sen. Marco Rubio. The Florida Republican recently teamed up Indiana Republican congressman Todd Young on a bill that would make it easier for American students to finance their education with ISAs.

The "Investing in Student Success Act of 2017" would amend the tax code to designate an ISA as "a qualified education loan." That would make ISA payments tax-deductible, just like student-loan payments. The bill isn't necessary for colleges like Purdue to start up their own ISA programs, but it would make ISAs a more attractive option.

"This innovative legislation would empower students to leverage their future income today and access the financial resources of businesses, individuals, and nonprofit organizations in order to achieve their higher education goals," Rubio said in a news release out February 2.

Purdue University

Purdue University is so far the only the traditional four-year university with its own ISA program. It's called "Back a Boiler" and it has disbursed $2.2 million to 160 juniors and seniors since it launched last year.

Some distinct features of Purdue's program include:

  • A limit to how much a student can take out. In order to prevent students from taking on too big a financial burden, Purdue limits the amount a student can fund their education from an ISA to 15% of their total postgraduation income (this is the total amount for their education, not each academic year). In contrast, Purdue can't limit the terms of private loans.

  • If a student makes less than $20,000 a year, they don't have to pay anything. That's it, no asterisks. So if a student makes $20,000 or less during the entire time of their contact, then he or she doesn't make a single payment.

  • There's a cap for how much a student can pay. So even if a student has a very high income right out of college, he or she won't have to pay more than 2.5 times the original ISA amount.


"Many of the universities we are working with will have limits on how much students can take out, and similar terms to what exists at Purdue, but numbers will vary slightly program to program," said Tonio DeSorrento.

Purdue will expand its ISA program for the next academic year to freshman and sophomores. Brian Edelman, chief operating officer of Purdue Research Foundation, told Business Insider that he thinks it's feasible for all Purdue's students to take out an ISA if they have the financial need.

“Our goal for the first year was to offer 'Back a Boiler' to students who planned to borrow through private and Parent Plus loans in addition to any public-subsidized loans,” Edelman said in a press release.

“We wanted to offer an option to reduce that interest-bearing debt

and I believe we have that with this program."

What an ISA looks like over time

Whether an ISA is a good deal for college graduates depends, of course, on how well they do.

Let's say a student, Jerry, is working toward a degree in art history at Purdue University. If Jerry were to take out a $10,000 ISA to help pay for his degree, then in this case he would be required to pay 3.92% of his income for a 10-year period, according to the comparison tool on Purdue's "Back a Boiler" site.

Since ISA monthly payments are based on income as a person's income increases, so too do their monthly payments. Likewise, if a person were to witness a dip in their annual wage, then the monthly payments for their ISA would decrease as well.

In this example, the student would end up paying more for an ISA than a PLUS loan, but less than he would for a private loan. This is not always the case. In certain instances students can pay substantially less under the terms of an ISA compared to a Plus Loan of private loan. And technically, in some cases, they can actually pay nothing.

Further, there is typically a max payback of 2 or 2.5 times the original disbursement with ISA. For example, if a student were to take out a $10,000 ISA, then his or her max payback would be $20,000. With student loans, on the other hand, there is no cap for how much a student is required to pay. And in some cases, thanks to fees and compounding interest, repayment can equal many times the borrowed amount.

This is what Jerry's monthly payments would look like under the terms of his ISA. In total, Jerry would end up paying $16,194 for his ISA.

The downside

ISAs do have their downsides. First, there is the possibility that a high-earning student pays more than a private or federal loan.

According to a note penned by Robert Kelchen, an assistant professor of higher education at Seton Hall University, those high-earning students might be better off with a loan.

Students who think they'll make a lot of money after college may not want to consider the ISAs either. ISAs require students to pay a fixed percentage of their income. So, they can be an expensive proposition for students who do really well even if the terms are better than for other majors.

These students would be better off taking on federal and private loans and then consider joining the growing number of students who are getting their loans refinanced by a new generation of private lenders, who are willing to give borrowers with successful careers loans on lower interest."

The future

Nevertheless, ISA advocates are hopeful for 2017.

"We are working with some very well-known schools who haven't publicly announced yet that they are thinking about rolling out their own ISA program," DeSorrento told Business Insider.

"This year is a game changer for this market," Charles Trafton said.

That optimism is warranted considering a recent report by the conservative think tank American Enterprise Institute titled "Student and Parent Perspectives on Higher Education Financing."

"What found that the demand for ISAs is out there," Jason Delisle, who wrote the report, told Business Insider.

"And there is no typical person who prefers an ISA over a loan."

That, he says, bodes well for their future.

"The demand for an alternative to loans exists, so it stands to reason that if colleges start implementingthese types of programs, they will be utilized," Delisle concluded.