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.

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.

Aaisha Dadi Patel
Aaisha Dadi Patel
Aaisha Dadi Patel cut her teeth at The Daily Vox in 2014, and now works in a freelance capacity. She's written about everything from politics to polar bears, with particular interests in gender and Islam. She holds an MA in Media Studies from the University of the Witwatersrand.

READ IT IN FULL: Ramaphosa’s address on the extension of...

This is the full address given by President Cyril Ramaphosa on April 9

Meet the doctor leading Africa’s fight to contain the coronavirus...

Dr Matshidiso Moeti’s father helped to eliminate smallpox. Now she’s leading Africa’s efforts against the coronavirus

Stella set to retain her perks

Communication minister will keep Cabinet perks during her two months of special leave

Covid-19 grounds Nigeria’s medical tourists

The country’s elites, including the president, travelled abroad for treatment but now they must use the country’s neglected health system

Press Releases

Rahima Moosa Hospital nursing college introduces no-touch facial recognition access system

The new system allows the hospital to enrol people’s faces immediately, using artificial intelligence, and integrates easily with existing access control infrastructure, including card readers and biometrics

Everyone’s talking about it. Even Kentucky

Earlier this year South African fried chicken fast-food chain, Chicken Licken®, launched a campaign for their wallet-friendly EasyBucks® meals, based on the idea of ‘Everyone’s talking about it.’

New energy mix on the cards

REI4P already has and will continue to yield thousands of employment opportunities

The online value of executive education in a Covid-19 world

Executive education courses further develop the skills of leaders in the workplace

Sisa Ntshona urges everyone to stay home, and consider travelling later

Sisa Ntshona has urged everyone to limit their movements in line with government’s request

SAB Zenzele’s special AGM postponed until further notice

An arrangement has been announced for shareholders and retailers to receive a 77.5% cash payout

20th Edition of the National Teaching Awards

Teachers are seldom recognised but they are indispensable to the country's education system

Awards affirm the vital work that teachers do

Government is committed to empowering South Africa’s teachers with skills, knowledge and techniques for a changing world