Income-Share Agreements Pay for College
It won't be long before high-school seniors will need to decide if they want to go to college and, if so, how to finance their studies. It's a decision that has life-long implications. Hillary Clinton has proposed a plan called the New College Compact, which would enable students at public institutions to avoid taking out loans ("Democrats Offer Ways to Make College Affordable," The New York Times, Aug. 11). But there's another way known as income-share agreements that I believe merits serious consideration ("More College Students Selling Stock-in Themselves" The Wall Street Journal, Aug. 6).
These agreements are appealing to many students and their parents because they are a hedge against an uncertain financial future. In exchange for a stipulated share of future earnings, an income-share entity funds the student's college expenses. If students don't get a well-paying job, they are obligated to pay only five percent of their income for 15 years. These payments don't begin until graduates make at least $18,000 annually, and they're not limited to public colleges and universities. In other words, an income-share agreement is like an insurance policy.
The trouble is that some students could wind up paying more than they otherwise would under a traditional loan. It's impossible to know which majors will hold their market value down the road. Right now science, technology, engineering and math are hot. But even within this group, not all majors offer the same salary premium. For example, biology majors are not rewarded as well as chemistry majors. Civil engineers are not paid as well as petroleum engineers. When it comes to the humanities, all bets are off because holders of these degrees too often work in jobs that have nothing to do with their studies.
Student debt is not dischargeable in bankruptcy, except under the most unusual circumstances. As a result, income-share agreements seem to offer a better way out. But as with so many other initially enticing pitches, I urge caution. They're simply too new to judge.