A recent government study indicated the following correlation: for every dollar that federal financial aid provided to college students, tuition rose 65 cents. Which basically means that taxpayers en masse paid for the ability of higher education vendors to build fancy dormitories, compensate their professors at above-average rates and add administrative positions at a disproportionate pace.
Put another way, the net cost to students did not become cheaper, regardless of which combination of numbers one puts together. Current student debt levels exceeding $1.1 trillion, with default rates in the teens, are the bottom line.
Do there exist well-reasoned re-examinations of the cost structure of colleges. Yes, but they are confined to the readership of publications coming from a few think tanks. Higher education still manages, despite lamentably low graduation rates, to successfully use the defensive mantra of “you [the critics] do not understand.”
As a consequence, most providers of money to prospective collegians focus their efforts on the funding side of the issue without becoming activist on the issue of the cost of higher education. It is as if nobody cared about the cost of the car as long as the buyer could borrow the necessary money.
Leaving aside the historical role of outside college scholarship providers, there are now prospective additional entrants, who seem to have both an investor and non-profit mentality. What they do is provide funds to a college student for a stipulated portion of the net cost of college under an arrangement whereby the student repays the funding through a portion (4-5%) of his future earnings for a set number of years. (If there is sufficient financial clout and the energy to spend hours with bureaucratic college officials, the funders may actually come to a reasonably accurate figure on the true net cost of higher education, without in any way changing the obtuse overall nature of college accounting).
The student’s repayment does not go into the fund provider’s pocket but is recycled into funding for additional students. There may not be an attempt to connect inflation rates in either individual income or college tuition, which creates the risk of mismatches, most likely going against the individual. The out from the formula is that the repayment percentage does not change and once the set number of years has been met, the student no longer owes anything, regardless of how much money has been repaid. This means that if the student cannot pay back in a given year, the deficiency is not added to the unpaid balance of the debt.
This particular student funding gambit is labeled an “Income Sharing Arrangement” (ISA). Because it is outside the federal and state loan modus operandi, it may have a dual appeal to funders who are not impressed by the role of government in general and who like the incentive alignment of an ISA. Of course, the ISA is not completely devoid of government influence as it is affected by tax policies relevant to everything it does, whether it be investing or the involvement of non-profit entities or the unique position of higher education with respect to gift tax rules. Undoubtedly there are legal issues related to ISAs as well, which have yet to be decided upon by regulatory bodies or courts.
More importantly, an ISA could be a low-cost replacement for the government’s ultra-expensive Parent Plus Loan option, and much cheaper than conventional consumer credit.
The optics of an ISA seem to have the potential to be unfortunate: wealthy, mostly white benefactors seemingly being repaid (even if not to their own pockets) by college graduates from lesser income minority families. Such an arrangement seems likely to feed opponents of education reform, who constantly put forth the straw man of privatization (and more than a passing reference to racial divisions) to support their bogus case.
My own world in terms of funding collegians has had these characteristics: Hispanic, ESL, First Generation, low income—and more than a few documentation challenges. When I printed out the 15-page description of 13th Avenue Funding, an early non-profit ISA effort, I had a hard time imagining anybody I know—parents, students, school officials—being on the same page (pun intended). There is already enough of a bias against the indefinable legalese of lengthy written documents. There is already a screaming need for more guidance counseling, as in human interaction, not website print-outs.
Perhaps the target audience is those of whatever socioeconomic background who have the characteristics of (1) experience with formal financial commitments, (2) income that is too high for FAFSA-based financial aid but too low to afford the target school of their offspring, and (3) a prior college graduate somewhere in the family tree.
A more specific target audience is students from the handful of urban schools which have moved their standards of academic rigor to a level that matches well with of selective colleges. Said students can benefit at the college level from the money and the support services provided in the ISA approach.
Elsewhere, it is debatable whether the combination of ISA funding and services is relevant to students who have suffered from the generally abysmal academic preparation of most urban high schools in the country, which disproportionately affects urban minority students.
Still, If incentives are properly and consistently aligned, as mentioned earlier, and high quality services are provided, there will be some broadening of the attraction of the ISA. As is true in most cases of policy evaluation, the ISA idea must be looked at in comparison with …….. fill in the blank with other financial alternatives, each with its own combination of positives and negatives.
In any event, it would be incrementally helpful if every ISA dollar was matched ten to one by funding of well-designed college-relevant reform efforts that would be more than band-aids, maybe at least tourniquets anyway, for the broken legs of the current higher education system.
Pending such an effort (which some might say is slowly taking place, through the efforts of multiple change agents and the Obama administration), if an ISA can help students who otherwise could not get to and graduate from college, it is hard to deny its usefulness. The comments above should be regarded as cautionary issues, not an attack on the ISA concept.