Is Paying for College Worth It? Income Share Agreements and the Student Debt Crisis.

Vickies Fales is a recent divorcee who lives in Minneapolis. She has two children, an 18-year old son and a daughter who just turned 14. Her son, Ryan, wants to go to a well-respected vocational and technical school called the Dunwoody College of Technology to study how to be a mechanical engineer. But Vickie has a bad case of sticker shock: A two-year degree costs $50,000.

Fales commutes nearly an hour every morning to Cannon Falls, an exurb southeast of the Twin Cities, where she grew up and where she lived until the divorce, and works two different jobs as an insurance agent and tax consultant. In other words, she’s very good with numbers. But the idea of Ryan’s higher education isn’t quite adding up, since she’s living on an annual income of just above $38,000.

Ryan just graduated high school in Cannon Falls, where his father owns a successful machine shop. His father could likely teach Ryan a good deal about what he needs to learn to be a mechanical engineer, but he wouldn’t have the degree to take with him into the workforce. Moreover, Vickie Fales has been scrambling to get Ryan to qualify for several loans and scholarships, to not much avail.

“I don’t know how we’ll pay for it,” Fales says, “but I feel like he needs to go to school.”

As tuition costs at colleges and universities continue to spike tremendously – some would say without a whole lot of benefit to actual classroom instruction – and student loan debt has become something of a nationwide crisis, more parents and students are considering skipping that degree altogether. Student-loan debt now sits at more than $1 trillion nationally, and loan forgiveness has now become a part of the national dialogue. The impulse to bypass the investment in education and jump into the workforce is understandable, but does that actually save money?

Most studies show that a college degree is still a good investment, but with the cost of college exploding, that may quickly change. That’s why economists are exploring a different, more affordable way to pay for college. And some claim they have found the answer: Income Share Agreements (ISAs), innovative new financial vehicles which allows investors to give individuals money upfront in exchange for a percentage of their future earnings.

First, let’s look at the studies. This New York Times piece says, emphatically, that college is worth it.

“A new set of income statistics answers those questions quite clearly: Yes, college is worth it, and it’s not even close,” David Leonhardt of the New York Times writes. “For all the struggles that many young college graduates face, a four-year degree has probably never been more valuable.”

Leonhardt points to a recent study of Labor Department statistics. The pay gap between college graduates and everyone else reached a record high last year, according to the new data, which is based on an analysis of Labor Department statistics by the Economic Policy Institute in Washington. Americans with four-year college degrees made 98 percent more an hour on average in 2013 than people without a degree. That’s up from 89 percent five years earlier, 85 percent a decade earlier and 64 percent in the early 1980s, according to the study.

Looking at those statistics, Leonhardt concludes that there is not a glut of college graduates on the job market.
“We have too few college graduates,” says David Autor, an M.I.T. economist, who was not involved in the Economic Policy Institute’s analysis. “We also have too few people who are prepared for college.”

And this piece by CBS News estimates that skipping out on college could cost someone $830,000 over their work lifetimes.

Still, Leonhardt of the Times points to the good news. Among four-year college graduates who took out loans, the average debt is about $25,000, a sum that is a tiny fraction of the economic benefits of college. And the unemployment rate in April for people between 25 and 34 years old with a bachelor’s degree was a mere 3 percent.

MIT economist David Autor says in this interview, “The relative wage differential between college and high school graduates is higher than it’s ever been. Now, college has gotten more expensive, but relative to the lifetime earnings differential, it’s still quite an attractive investment proposition.”

While most agree college is worth it, some disagree. Craig Brandon, Award-winning author of The Five-Year Party: How Colleges Have Given Up On Educating Your Child and What You Can Do About It, is one of these people. In this article, Brandon claims that the rising cost of college is becoming too much financially for children not serious about their education. “At the current price tag,” he says, “it makes no economic sense to send most kids to college. High school guidance counselors recommend college for 90 percent of their graduates because it makes parents happy, and it is parents who need to wake up to the new economic reality of higher education.”

Hearing both sides of the argument, it is clear that the cost of college is at the core of the problem. Over the last decade, college has become so expensive, some people just won’t be able to pay back their student loans, and therefore, decide not to pursue higher education. This problem has paved the way for economists to find a better way to fund the college education.

As this piece in Slate points out, ISAs may be the answer. On April 10th, income share agreements came into the national spotlight when Sen. Marco Rubio and Rep. Tom Petri introduced legislation that could broaden the use of such investment vehicles by formally defining their terms. Additionally, Rep. Merkley has introduced legislation in Oregon to use ISAs to help reduce the burden of student funding – legislation that has been used as a template for legislation now proposed in 25 other states.

An ISA is simple. You take money to pay for college in agreement that you will pay out a certain percentage of your income over a fixed period of time. While some folks may take lower-paying jobs after college, others will see lucrative salaries. No matter what happens, since these same borrowers are paying a fixed percentage of their income, these payments will be inherently affordable. This will should keep down default rates, while allowing returns for investors that are better than with traditional loans. Another plus side to ISAs is there is a strong alignment of financial interests between investor and student.

On the borrowing side, for someone like Vickie Fales, who is as exasperated with scrambling to find money as she is worried about her son’s future, an ISA may save her dream.