How income-sharing agreements can improve access to education

Education is crucial to unlocking better livelihoods. As recent studies highlight, your education impacts your ability to get a job and the income-level of you and even that of your grandchildren.

Equal access to education remains a pressing issue, including in developed economies. A large number of factors come into play, yet financing seems to be a pervading issue. Current philanthropic, government and bank instruments are not sufficient.

In this context, a new financing solution based on private capital has come to light: income-sharing agreements (ISAs). Will they revolutionize the way we fund education?

An ISA is a contract between a student and an investor (or a school). The investor covers the tuition fees and the student promises to pay back a percentage of his future income for a fixed number of years.

In 2017, Andrew Hoyler, a graduate from Purdue University, received $16,000 through an ISA. He is now repaying 5.9% of the monthly income he earns working as a regional pilot. To quote Hoyler, the ISA has been “more streamlined and easy to understand’. He can also enjoy peace of mind, knowing his entry-level wage as a pilot allows him to afford the ISA payments.

Such contracts come with several advantages, especially in comparison with traditional loans:

For private investors, ISAs allow them to contribute to solving a pressing issue while making a return and entering a new market. With such advantages, it is no surprise that many ISA contracts have already been set up, notably in the US where the student debt issue is gaining heat.

ISAs still come with many ethical and legal risks. While this solution is very attractive, we must note that the concept is still widely unregulated and has many ethical ramifications.

Legally, ISAs bring several risks for students, including a lack of borrower protection. Some investors may not have a student’s best interest at heart and could impose inacceptable clauses or charge usury fees.

Financially, before investing in such schemes, private funders must consider the many inherent risks and the potential mitigants put in place:

ISAs pose many ethical questions that need to be tackled to ensure a human-driven model:

All this points to a strong need for creating a legal framework but also enforcing tight governance and setting clear impact goals.

Blended finance aims to strategically use public or philanthropic funds to mobilize additional finance towards solving societal issues. In the case of ISAs, mixing different sources of funding would help find the right governance and balance.

As mentioned above, pooling private capital into a fund financing hundreds of beneficiaries could enable risk diversification. However, the temptation of selecting students depending on biased criteria is high. Forcing fund managers to adopt non-discriminatory policies and diversity measures would mechanically imply an increase in the risk of the ISAs portfolio. This, in turn, could raise the expected returns, bringing a higher average cost for the beneficiaries. Blended finance can help avoid this pitfall.

In the case of ISAs, concessional investors and/or philanthropic donors could be useful:

Such ideas, along with proper regulation, could help make ISAs a truly impact-driven model.

ISAs have great potential to alleviate the current financing hurdles faced by students in developed, but also in developing countries. They could, in fact, serve to finance students in emerging economies wanting to study in developed countries and reduce a perceived obstacle to access to education for all.

ISAs bring private capital into a social impact sector and open new investment opportunities for investors. However, one needs to be very cautious when structuring such a tool: if wrongly designed, ISAs can easily become discriminatory and/or unjust. In this context, we believe that blended finance could make ISAs a truly human-driven impact solution.