US students find new way to pay for education – their future earnings

The cost of tertiary education is now such a burden to students in the United States that some have taken to selling a portion of their potential future earnings to fund it.

Bloomberg reports that Purdue University in Indiana has arranged more than 700 contracts worth $9.5-million and has secured investment funds totalling $17-million since piloting an income share agreement (ISA) programme in 2016.

With student debt currently weighing down the US economy — Bloomberg puts the amount at the end of 2018 at $1.5-trillion — students have had to find new ways to finance their studies. Traditional sources of funding — scholarships, bursaries, government grants and loans — are either unavailable or too expensive.

Now private companies and some universities are putting in place agreements between students and investors that see the students’ education paid for in exchange for a certain fixed percentage of their future salary for a period after graduation.

Purdue caps total payments at 2.5 times what a student borrowed. Students pursuing more lucrative fields of study pay lower monthly percentages. At Purdue, English majors borrowing $10 000 pay 4.52% of their future income over nearly 10 years, while chemical engineers pay 2.57% in just over seven years.

Graduates earning less than $20 000 a year won’t be charged as long as they are working full time or are seeking work. Those who are working part-time or not job-hunting will have their payments deferred, meaning they will owe for a longer period of time.

David Cooper, Purdue’s chief investment officer, says the programmes are drawing more attention now that they have more than 20 months of repayment data available. “We feel like we’ve got the pricing for the students at a pretty good spot,” he says. “At the same time, it’s a reasonable return for the investors.”

Could such a system work in South Africa? Gordon Institute of Business Science’s Adrian Saville says ISAs could change someone’s circumstances: “The person has to think of themselves as a business. They are going to fund themselves to get future earnings either by borrowing or through selling some shares in the ‘company’ equity — that is, themselves — which means they’ve given away ownership of their earnings.”

An advantage of the ISA is the grace period on repayment, depending on earnings and employment status that is not there with a conventional student loan.

Lyle Prim (31), an MBA student at the University of Cape Town’s Graduate School of Business, had to take out student loans with Nedbank and Absa. Both he and Saville warn of the risks that the ISAs could have.

“Someone can put money into my idea and share in the proceeds if I am successful, but they come on risk,” says Saville. From an investor’s perspective, there are multiple risks, including defaulting debtors.

As with the National Student Financial Aid Scheme (NSFAS), debts are meant to be repaid, but currently just 29.4% of them are, NSFAS says.

And, with a high unemployment rate, there is also no guarantee that graduates will get a job or that they will earn enough.

“The time it takes to get a job and the amount of debt accumulated in that search, coupled with low salaries, does not make ISAs beneficial,” says Prim.

“Current entry-level salaries are inadequate to meet the demands of individuals living and working in South Africa. An increasing cost of living prevents you from giving any of your money away,” he says.

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Aaisha Dadi Patel
Aaisha Dadi Patel
Aaisha Dadi Patel was previously a member of the M&G’s online team. She holds an MA in Media Studies from the University of the Witwatersrand

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