By: Tana Gildea
Tired of the same old investment stock and bond options? How about investing in a future teacher, engineer, or doctor and getting a percentage of their future income as your return? That’s what some institutional investors are doing via Income Share Arrangements (ISAs). While it sounds like a new idea, Milton Friedman actually proposed such an arrangement back in the 1950’s with Yale University implementing it. They had the requirement that all funded graduates pay a percentage of their income until the entire pool was paid off. Sounds great if you are a low-salary earner who pays less over the term than the higher-earning counterparts! Of course, there were defaults and Yale ended up bailing out the program. Regardless, the interest has been building since 2009 when Lumni, one of the pioneering companies, entered the ISA space.
With the rising cost of college and student loan debt at over $1.5 trillion, schools as well as students are looking for better options. Purdue University has been a leader in developing and implementing ISA programs. “Purdue has arranged more than 700 contracts worth $9.5 million and closed two investment funds totaling $17 million.”1 They have had various iterations and modifications to their agreements including putting a cap of 2.5 times what the student borrowed to keep the most successful from over-paying on the defined “share of income” over the required term.
From the students’ standpoint, there are mixed reviews. Consider that English majors will pay 4.5% of their income for almost 10 years versus computer science majors who will pay 2.6% of their income for just over 7 years. That is an agreement to cover one year of college. If a student has multiple agreements or also took out student loans, the burden is still heavy. According to Julie Margetta Morgan, a fellow who studies higher education, “It’s pretty darn near impossible to say whether an ISA is better or worse for an individual.”1 That means that students have to read the fine print and do the math to compare options. Whether a student commits future income or repays debt, it is still a drain on resources post-graduation.
For investors, there are only a few schools using outside investment firms to provide capital for the ISA program. Some schools do solicit individual donors, usually wealthy alumni who are already generous in their support of the school. For those offering ISA investment funds, such as Purdue, those investments “may make the most sense for socially conscious investing.”1 The return history is just not sufficient to quote the type of returns that investors focused on maximizing return may be likely to see.
For now, it’s unlikely that we will offer you any opportunities to invest in engineers or scientists, but one never knows how this will play out in the future. You can certainly give this a try with your own budding professional!
Chuck Trafton of Flowpoint Capital Partners says he can “envision a whole new equity market for higher education in the next five years where today there is only debt.”1. May it be for the benefit of the students as well as the investors!
1 “Investing in College Grads—Literally,” Clair Boston, Bloomberg Business, April 15, 2019