Two new federal bills have been introduced (one in the House, one in the Senate) to expand the use of “income share agreements” as an alternative to traditional loans in which private investors or organizations finance higher education costs or other financial needs in exchange for a percentage of future earnings.
This comes at a time when student debt has never been worse. The total student debt is $1.08 trillion, 11.5% of which is 90 days past due or delinquent. It’s clear that the current state of student debt is disconcerting. According to an analysis by Forbes, “The student loan problem may have greater repercussions for the economy than the housing problem did. Student borrowers are delaying major life decisions, like buying a home or car, as a result of their student loans.”
Last September we addressed the concerning student debt problem in this blog post. Banks and regulators are starting to see the problem too. By the end of 2013, big banks like JPMorgan Chase even shut down their student loan departments, claiming the current student loan market to be unsustainable.
These bills may help reform this fragile but crucial industry. Companies like Upstart and Pave already offer these financial vehicles. The pending legislation would make them more widely available by creating a legal framework for them. “Many players have resisted getting into the marketplace because they’re not sure of the legal certainty behind it,” says US Senator Marco Rubio (R-FL). Senator Jeff Merkley (D-OR), another vocal supporter of income share agreements, has stated that the country needs “bold new initiatives” when it comes to reforming the lending industry.
Rubio says private investors and organizations can invest the same way they invest in a business. “They could invest in a person,” says Rubio, “who basically says: ‘This is who I am. This is what my career goals are. This is what I’ve done so far. This is what I intend to major and graduate in. And in return, when I graduate, I will pay a percentage of my salary over a defined period of time in return for that investment.'”
U.S. Rep. Tom Petri (R-Wis.) — who introduced the companion legislation in the House — says the financial instruments would supplement, not replace, traditional student loans in many cases.
At Cumulus, we welcome the legislation. We believe, with proper regulation and legal frameworks in place, income share agreements can provide much better outcomes for both borrowers and providers of funds. While Rubio’s “income share agreements” invest in higher education, we are investing in American workers, offering money in exchange for a small percent of an individual’s future wages. This new way of funding individuals can fix many problems with lending and the financial system, aligning the economic interests of those providing capital with those receiving it, in a way that traditional loans simply cannot.