The US Department of Education is in the process of creating an experimental program whereby a limited number of colleges would take over federal student debt, with students then repaying the loan balance to the institution, potentially based on their future income.
As a result, the experiment would allow federal loans to be repaid through some form of income-sharing agreement, where students agree to pay a certain percentage of their future income over a given period in exchange for funding their studies. educational program expenses. .
The idea will certainly be controversial. Some experts already argued that the experiment could be illegal and would pervert the mission of the student loans program while threatening the protection of borrowers.
Others, however, said the experience could provide lessons on creative ways to fund higher education.
Details remain scant on the federal ISA lending experience, which has yet to be officially announced. Federal officials discussed the idea at a financial aid conference earlier this month, and Inside higher education got a short service document about that.
The ministry can derogate from the federal rules on aid to carry out limited experiments within the framework of its experimental sites initiative. The aim of such projects is to test ideas within a controllable scope and to use what has been learned to inform federal aid policy. However, such experiments in the past two or three administrations tend not to produce enough usable data or other evidence to adequately contribute to policy debates, some experts have argued.
A small but growing number of colleges and other post-secondary education providers are trying revenue sharing agreements. Purdue University and the University of Utah both offer ISAs, as do several small private colleges and boot camp providers, among others.
(A recent paper of the Consumer Finance Institute of the Federal Reserve Bank of Philadelphia analyzes the emerging market for revenue sharing arrangements in post-secondary education.)
The concept is more and more in vogue in higher education political circles and has some appeal across party lines, in part because it creates an arrangement that shares certain attributes and intentions with income-driven repayment plans for federal loans.
Critics, including Senator Elizabeth Warren, say ISAs are just another form private loan.
Diane Auer Jones, deputy principal under secretary and senior official for higher education at the ministry, has previously expressed interest in the use of federal funds in ISAs.
The Trump administration has partially argued for the experiment, citing another increasingly popular notion on how to hold higher education accountable: demanding that colleges play the game with student loan debt.
“The department believes that by offering students more options for financing higher education, institutions can take a greater risk position in student outcomes in a proactive manner,” said the paper describing the experience. , “and more carefully align pricing structures with projected student income to ensure the best return on investment for students.
The tuition rebates and scholarships allow colleges to redistribute tuition fees among a larger group of students, the department said. And these institutional grants can also mean that a college is taking a “risky position” on a student’s decision to enroll.
Likewise, other college funding options such as ISAs can help institutions “improve a student’s educational return on investment,” the department said, and “reduce fear of daunting repayment obligations for students. students reluctant to take on debt ”.
Colleges tend to offer revenue sharing arrangements, usually with assistance in running these programs from outside companies or nonprofit groups, often only after a student has declared a major and only as a supplement. a federal loan.
“This means the student could end up with both a student loan repayment obligation and an alternative funding obligation,” the ministry said. “Having to make both payments could jeopardize the benefits otherwise provided by alternative financing, including income-based reimbursement programs. “
Colleges participating in the possible experiment would be permitted (at the request of the student loan borrower) to assume the repayment obligation of a student’s federal loans. In return, the borrower would repay the balance to the institution according to a predetermined methodology.
“Under such a plan, an institution has the skin of the game because it is financially linked to the return of the borrower on his educational investment,” said the department. “Taxpayers will also be protected because an institution is more likely to meet its repayment obligations than a student who may struggle to cope with multiple debts and pay basic living expenses. “
Students would have the choice of participating in such an experiment and could instead choose federal direct loans rather than the institutional funding option.
Even so, the experience would create a lot of risk, said Clare McCann, deputy director of federal higher education policy with New America’s education policy agenda.
McCann and four of his colleagues (including experts from the Century Foundation and the Institute for College Access and Success) co-authored a blog post challenge the experiment according to its probable parameters.
“The department plans to oversee a perversion of the federal loan program in which, in essence, federal loan dollars will be used to fund private education loans,” they wrote. “Naturally, this announcement raised huge questions.
The experiment would be based on two main exemptions from federal loan laws.
First, it would allow colleges to limit student borrowing beyond the currently allowed basis on a case-by-case basis, including limits based on their program of study or likely income. This exemption could be used alone as part of the experiment, the ministry said, or as part of an institutional funding option.
In addition, the ministry would allow colleges to repay a loan on behalf of their students. This is currently not allowed because colleges could help students pay off their loans to help skew their federal default rate.
Colleges would also be allowed to raise private capital to supplement the federal dollars as part of the experiment.
McCann and his colleagues questioned whether the experiment would go beyond what is possible under an experimental site, going beyond Congress’ intention for the program. Specifically, such experiments under federal law cannot override the rules for awarding grants or loans, they said, including apparently changing the terms of the loan, which would be the case in this experiment. .
The possible experience also increases the risk of discrimination, wrote McCann and colleagues. Discriminatory impacts are likely, they said, as university program choices tend to be sharply separated. And they cited arguments that ISAs could worsen equity gaps and expressed concern over whether the Trump administration would prevent colleges from offering unreasonable repayment terms.
Many questions about the experiment remain unresolved, McCann and colleagues said. But they said one thing is clear: “Borrowers who sign these revenue sharing agreements will not get the deal they were promised under the direct loan program.
Weigh the possible benefits
Other experts have had mixed reactions.
The experiences can teach financial aid experts what works and what the possibilities are for further work, research and investment, said Alison Griffin, senior vice president and head of higher education practice at Whiteboard Advisors.
“The department’s recent announcement of an experimental site that will allow education providers to maximize investments in the name of student aid may better understand how an institutional financial commitment has the potential to transform the way students can finance their post-secondary education, ”she said via email. .
Griffin said it remains to be seen how the results of this experiment could inform the growing interest in revenue sharing agreements.
“Right now, the most important work Congress and the administration could do on behalf of the ISA space is to ensure consumer protection by establishing a legal and regulatory framework,” she said. .
Beth Akers is a senior fellow at the Manhattan Institute who wrote on ISAs. She said she had mixed feelings about the experience.
While she is optimistic about the ability of ISAs to solve perennial higher education problems, such as tuition inflation, financial risk, and information asymmetry, Akers is concerned about the intervention structure designed.
“I would prefer the administration to make an effort to incorporate some of the benefits of revenue sharing agreements into the existing loan program to make it more effective,” she said in an email. “For example, the collection of student loan repayments through an income-based scheme borrows from the principles of income-sharing agreements. Switching to a system that collects repayments this way and doesn’t force borrowers to sign up for confusing repayment plans would be an effective way to introduce innovation into federal loans without adding more complexity.
Additionally, Akers said she was concerned about the department’s ability to effectively oversee the experiment.
“Poor implementation could leave students worse off than they otherwise would have been,” she said.