This fall, Purdue University undergrads will welcome two things: their parents waving goodbye and their tuition bills frozen for the fourth straight year — with a fifth tuition freeze coming for undergrads in 2017-18. Purdue under efficiency-wise President Mitch Daniels is showing colleges across the nation how to control costs, restrain tuition increases and still provide a quality education.
But across the country, college tuition remains ruinously high for many students who graduate with staggering debt loads. Thousands of young people wind up defaulting on those loans, wrecking their credit. Many more delay their lives — marriage, buying a home or starting a business — because of their onerous debt burden.
Is there a better way to help students afford college and its aftermath?
Daniels thinks so. He has launched “Back a Boiler,” an innovative program for students to finance their education and get a job without a crushing debt-repayment schedule. The concept is called an income-share agreement — first proposed by famed University of Chicago economist Milton Friedman in the 1950s.
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Here’s how it works:
A student needs, say, $20,000 for tuition. Instead of borrowing it via private or federal sources and then being on the hook to pay it back with interest after graduation, the student instead signs an income-share agreement.
The Purdue Research Foundation, a nonprofit that serves the mission of Purdue, fronts that student the $20,000. In exchange, the student promises to pay a set percentage of his or her post-college income over the next nine years or fewer.
The terms — payments and length of payback — vary according to the student’s major and her post-college job prospects. A chemical engineering major is projected to earn a higher salary and would pay a lower percentage of her income. A history major would pay a higher percentage on his lower estimated salary.
If students snag better jobs and earn more, the payback would be higher because each graduate’s repayment percentage remains the same. The opposite is also true: If they earn less than the original projection, the paybacks would be lower.
If a student remains unemployed or earns less than $20,000 a year for the entire term of the contract, he would pay nothing. That’s right. Zilch.
Overall, students cannot pay more than 2.5 times the amount of the contract. Yes, students who land lucrative jobs could pay more than they would if they had taken out conventional private loans. That would be a windfall for the foundation, which plans to plow most of the proceeds back into the program to help more students afford Purdue.
It’s easy to see the appeal here: Grads can count on affordable payments for a limited time, no matter their income after college. There is no specific amount that must be paid back and thus no interest. Students never face a mounting loan balance that they may never be able to repay.
No debt collectors. No threats. No defaults.
As Daniels wrote in a Washington Post op-ed: “If the graduate earns less than expected, it is the investors who are disappointed; if the student decides to go off to find himself in Nepal instead of working, the loss is entirely on the funding providers, who will presumably price that risk accordingly when offering their terms. This is true ‘debt-free’ college.”
Well, not exactly. Students still are on the hook to fulfill their agreement. Purdue is betting, and so are we, that students won’t resolutely turn their backs on paychecks for years and loll on the beach to avoid paying a reasonable chunk of earnings back to the foundation.
Income-share agreements have a track record of success in Mexico and other Latin American countries, Daniels says. They have been tried sporadically in the U.S. but on a smaller scale than Purdue’s program.
The Purdue Research Foundation started accepting applications May 2. Officials there tell us they won’t know for several years if the program is a success. But we’re rooting for it. ISAs could offer immeasurable relief to many Purdue students — and their parents. And, we imagine, the program could become a much-copied model for other colleges.
Will battalions of Boilermakers take advantage of ISAs? Given Daniels’ history of savvy financial moves at Purdue, we say: Bet on it.
The above editorial appeared in the Chicago Tribune.