US pushes idea of tying tuition costs to future student income

The Trump administration is pushing US universities towards greater experimentation with income-share agreements, in which students cover tuition fees by promising their institutions or investors a share of future earnings.

The US Education Department is offering regulatory incentives for institutions to test ideas that could reduce both student borrowing and federal aid expenditures.

The approach – versions of which are employed elsewhere in the world – reflects the interest of the government and some in higher education in seeking to use the demonstrated long-term value of a university degree to solve the growing challenge of paying for one.

The administration wants to “responsibly limit borrowing and student debt”, said Michael Brickman, a senior adviser in the Education Department.

US universities, however, appear to need a good bit more convincing, and experts have warned about the likelihood of harm to low-income students if such agreements provide an incentive to cut government aid.

“We’re looking at it,” Michael Crow, the president of Arizona State University, said of the income-share concept. “We haven’t found that it works yet.”

“I think it’s one of these things that sound too good to be true,” said Mark Becker, the president of Georgia State University.

One of the few in the US already trying such a scheme is Purdue University, which has signed up hundreds of students. Under its plan, outside investors hold the debt, rather than the institution itself, and Purdue graduates pay nothing until six months after finishing their studies or their annual income exceeds $20,000 (£14,984).

Purdue’s president, Mitch Daniels, criticised the reluctance of his colleagues in academia to join in, writing in The Washington Post that many “are reflexively reactionary at the first scent of a new idea or a change in business as usual”.

However, critics have raised concerns about a model that has no principal balance or interest and instead locks a student into paying an investor or an institution a percentage of his or her salary for a set period after graduation. The system has been described as approaching “indentured servitude”.

A report this month by the Federal Reserve Bank of Philadelphia gave validation to a cautious approach. It said that income-share agreements have the “potential to address a number of market failures of the current system”, while adding the proviso that policymakers need “to build important guardrails that can help to prevent harmful outcomes for students and institutions”.

The federal government already offers a similar option, known as income-based repayment, in which it reduces its own collection amounts for borrowers who have relatively low earnings after graduating.

But that programme has been found to suffer from low participation among eligible borrowers, suggesting to many the critical importance of keeping any income-share model simple and understandable.

That has been an emphasis of the fledgling programme at the University of Utah, said its president, Ruth Watkins. Only 20 students have been enrolled so far, Dr Watkins said, and the scheme has been aimed exclusively at those deemed at risk of quitting their studies over finances.

“Terms are student-friendly; our only aim with the programme is timely completion,” she said.

Other ideas for universities to consider include systems that would put more of the risk directly on them, rather than on their students. Republicans in Congress have long been pushing an idea they call “risk sharing”, which would leave colleges financially responsible when their students face poor economic outcomes.

paul.basken@timeshighereducation.com