tag:theconversation.com,2011:/id/topics/federal-loans-27273/articlesFederal loans – The Conversation2016-07-26T04:51:05Ztag:theconversation.com,2011:article/624702016-07-26T04:51:05Z2016-07-26T04:51:05ZClinton and Trump proposals on student debt explained<p><em>Editor’s note: This is an updated version of an article first published on July 26, 2016.</em></p>
<p>The high price of attending college has been among the key issues concerning voters in the 2016 presidential election. Both <a href="https://www.hillaryclinton.com/briefing/factsheets/2016/07/06/hillary-clintons-commitment-a-debt-free-future-for-americas-graduates/">Democratic nominee Hillary Clinton</a> and <a href="http://www.cleveland.com/open/index.ssf/2016/10/donald_trump_talks_college_aff.html">Republican nominee Donald Trump</a> have called the nearly <a href="https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2016Q2.pdf">US$1.3 trillion</a> in student debt a “crisis.” During the third presidential debate on Oct. 19, Democratic nominee Hillary Clinton raised the issue all over again when she said,</p>
<blockquote>
<p>“I want to make college debt-free. For families making less than $125,000, you will not get a tuition bill from a public college or a university if the plan that I worked on with Bernie Sanders is enacted.”</p>
</blockquote>
<p>Republican nominee Donald Trump has also expressed concerns about college affordability. In a <a href="https://www.c-span.org/video/?c4625005/trump-higher-ed">recent campaign speech</a> in Columbus, Ohio, Trump provided a broad framework of his plan for higher education should he be elected president. </p>
<p>In a six-minute segment devoted solely to higher education, Trump proceeded to call student debt a “<a href="https://www.insidehighered.com/news/2016/10/14/trump-makes-his-most-substantial-comments-yet-higher-ed">crisis</a>” – <a href="https://www.hillaryclinton.com/briefing/factsheets/2016/07/06/hillary-clintons-commitment-a-debt-free-future-for-americas-graduates/">matching Clinton’s language.</a> He also called for colleges to curb rising administrative costs, spend their endowments on making college more affordable and protect students’ academic freedom.</p>
<p>The highlight of Trump’s speech was his proposal to create an income-based repayment system for federal student loans. Under his proposal, students would pay back 12.5 percent of their income for 15 years after leaving college. This is more generous than the <a href="http://www.chronicle.com/article/A-Closer-Look-at-Income-Based/238085?cid=rc_right">typical income-based plan available today</a> (which requires paying 10 percent of income for 20 to 25 years). The remaining balance of the loan is forgiven after that period, although this amount is <a href="https://www.newamerica.org/education-policy/edcentral/hidden-tax-bomb-inside-income-based-repayment/">subject to income taxes</a>.</p>
<p>As a researcher of higher education finance, I question whether these proposals on student debt will benefit a significant number of the over 10 million college-going voters struggling to repay loans.</p>
<h2>How student loan interest rates work</h2>
<p>Typically, students pay interest rates set by Congress and the president on their federal student loans. </p>
<p>Over the last decade, interest rates for undergraduate students have fluctuated <a href="https://www.edvisors.com/college-loans/federal/stafford/interest-rates/">between 3.4 percent and 6.8 percent</a>. Rates for federal PLUS loans have ranged from <a href="https://www.edvisors.com/college-loans/federal/parent-plus/interest-rates/">6.3 percent to 8.5 percent</a>. Federal PLUS loans require a credit check and are often cosigned by a parent or spouse. Federal student loans do not have those requirements. </p>
<p>While students pay this high a rate of interest, rates on 15-year mortgages <a href="https://fred.stlouisfed.org/series/MORTGAGE15US">are currently below three percent</a>.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/131803/original/image-20160725-31171-b8qdqy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/131803/original/image-20160725-31171-b8qdqy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/131803/original/image-20160725-31171-b8qdqy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/131803/original/image-20160725-31171-b8qdqy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/131803/original/image-20160725-31171-b8qdqy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/131803/original/image-20160725-31171-b8qdqy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/131803/original/image-20160725-31171-b8qdqy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Several private companies have entered the student loan market.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&searchterm=student%20loan%20dollars&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=309228119">Application form image via www.shutterstock.com</a></span>
</figcaption>
</figure>
<p>It is also important to note the role of private loan companies that have recently entered this market. In the last several years, private companies such as <a href="https://commonbond.co/">CommonBond</a>, <a href="https://www.earnest.com/">Earnest</a> and <a href="https://www.sofi.com/refinance-student-loan/">SoFi</a> as well as traditional banks have offered to refinance select students’ loans at interest rates that range from two percent to eight percent based on a student’s earnings and their credit history. </p>
<p>However, unlike federal loans (which are available to nearly everyone attending colleges participating in the federal financial aid programs), private companies <a href="https://commonbond.co/faqs/refinance">limit refinancing</a> to students who have already graduated from college, have a job and earn a high income relative to the monthly loan payments. </p>
<p>Analysts have estimated that <a href="http://www.bloomberg.com/news/articles/2015-06-10/student-loan-refinancing-boom-could-cost-u-s-taxpayers-billions">$150 billion</a> of the federal government’s <a href="https://studentaid.ed.gov/sa/sites/default/files/fsawg/datacenter/library/PortfolioSummary.xls">$1.25 trillion student loan portfolio</a> – or more than 10 percent of all loan dollars – is likely eligible for refinancing through the private market.</p>
<p>Many Democrats, such as Senator Elizabeth Warren of Massachusetts, have pushed for years, for all students to receive <a href="http://www.huffingtonpost.com/2013/05/08/elizabeth-warren-student-loans_n_3240407.html">lower interest rates</a> on their federal loans. In the past Republican nominee Donald Trump too has questioned <a href="http://thehill.com/policy/finance/248913-trump-why-is-federal-government-making-money-on-student-loans">why the federal government profits</a> on student loans – although whether the government actually profits <a href="http://www.gao.gov/assets/670/660548.pdf">is less clear</a>.</p>
<h2>Issues with refinancing of loans</h2>
<p>The truth is that students with the most debt are typically college graduates and are <a href="http://hechingerreport.org/the-student-debt-crisis-may-be-largely-about-the-smallest-borrowers/">the least likely</a> to struggle to repay their loans. In addition, they can often refinance through the private market at rates comparable to what the federal government would offer. </p>
<p>Struggling borrowers, on the other hand, already have a range of <a href="https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven">income-driven repayment options</a> through the federal government that can help them manage their loans. Some of their loans could also be forgiven after 10 to 25 years of payments.</p>
<p>Furthermore, the majority of the growth in federal student loans <a href="https://studentaid.ed.gov/sa/sites/default/files/fsawg/datacenter/library/DLPortfoliobyRepaymentPlan.xls">is now in income-driven plans</a>, making refinancing far less beneficial than it would have been 10 years ago. Under income-driven plans, monthly payments are not tied to interest rates. </p>
<p>So, on the face of it, as Clinton has proposed, allowing students to refinance federal loans would appear to be beneficial. But, in reality, because of the growth of private refinancing for higher-income students and the availability of income-driven plans for lower-income students, relatively few students would likely benefit.</p>
<h2>Focus needed on most in need students</h2>
<p>In my view, Clinton’s idea of allowing students to refinance their loans at lower rates through the federal government is unlikely to benefit that many students. However, streamlining income-based repayment programs (supported by both candidates) has the potential to help struggling students get help in managing their loans.</p>
<p>Nearly 60 percent of students who were enrolled in income-driven repayment plans <a href="http://www.usnews.com/education/blogs/student-loan-ranger/2015/09/23/follow-4-tips-to-stay-on-top-of-an-income-driven-repayment-plan">fail to file the annual paperwork</a>. That paperwork is necessary if students are to stay in those programs. And failure to do so results in many students facing higher monthly payments. </p>
<p>At this stage, we know many details of Clinton’s college plan. Her debt-free public college proposal (if enacted) would benefit families in financial need, but her loan refinancing proposal would primarily benefit more affluent individuals with higher levels of student debt.</p>
<p>In order to access Trump’s plan we need more details. For example, the current income-based repayment system exempts income below 150 percent of the poverty line (about $18,000 for a single borrower) and allows students working in public service fields to get complete forgiveness after ten years of payments. The extent to which Trump’s plan helps struggling borrowers depends on these important details.</p><img src="https://counter.theconversation.com/content/62470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Kelchen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How far will Donald Trump and Hillary Clinton’s proposals on student loans benefit their college-going voters?Robert Kelchen, Assistant Professor of Higher Education, Seton Hall UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/605852016-06-15T09:49:22Z2016-06-15T09:49:22ZThe truth about for-profit colleges and Trump University<p><a href="http://www.npr.org/sections/thetwo-way/2016/05/31/480214102/trump-university-playbooks-released-by-court-advise-being-courteous-to-media">Documents released</a> in a federal lawsuit against Trump University have put presumptive Republican presidential candidate Donald Trump on the defensive. Democratic candidate Hillary Clinton is <a href="http://time.com/4353917/hillary-clinton-trump-university/">now highlighting the fraud</a> that is at the center of the case. </p>
<p>In the process, <a href="https://www.washingtonpost.com/news/grade-point/wp/2016/06/01/what-trump-university-has-in-common-with-another-failed-for-profit-college/">many commentators</a> are identifying the Trump University business model as further indication of the fraudulent activity seen to be endemic to all for-profit higher education institutions. </p>
<p>I have been studying for-profit higher education since the late 1990s. While there are some parallels, Trump University is not representative of for-profit higher education. It is not regulated by the same agencies nor does it have to follow the same rules.</p>
<p>In fact, the Trump University case has little to do with the current challenges faced by for-profit higher education in the U.S.</p>
<h2>The for-profit university</h2>
<p>For-profit colleges and universities are educational institutions that operate for financial gain. They have been part of the higher education landscape since the <a href="https://jhupbooks.press.jhu.edu/content/diploma-mills">1800s</a>. For most of their history, they existed apart from traditional nonprofit and public colleges and universities. </p>
<p>For-profits educated students who were not interested in earning a degree and focused on fields that mainstream institutions were ignoring, such as stenography and bookkeeping.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/125946/original/image-20160609-7064-r7n94t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/125946/original/image-20160609-7064-r7n94t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/125946/original/image-20160609-7064-r7n94t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/125946/original/image-20160609-7064-r7n94t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/125946/original/image-20160609-7064-r7n94t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/125946/original/image-20160609-7064-r7n94t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/125946/original/image-20160609-7064-r7n94t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">How do for-profit universities work?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/gageskidmore/23443094212/in/photolist-BHzZaw-bY2FEw-eZWR1d-skSwkL-wF72U-wF6Pa-wF7pR-RGu8t-wF6Y3-ouQ9Ta-8XhNvG-61uVwu-asuh98-8XeLZa-qpiYu4-576zTv-6gUzdY-FXQ4yA-8Ac9Xx-oGNcUm-9XbEi-9Xckt-5hKXVm-4yPopz-4RrtEk-bkB32n-9XchC-ivJ6NV-DUT6RF-r6Jw1L-6w2WJr-6f4EKj-5BW5K2-6fez68-cLPk5j-5hDZ3c-7WwNsq-svtdqR-6w35gt-4QVgbB-4yUWDC-qs2u5U-sm94vQ-5MfmzX-7P8bpB-4yQ2zp-qo2R3u-899kcc-rT8t3-hazjPb">Gage Skidmore</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>That separate status changed after the <a href="http://lawhigheredu.com/102-proprietary-or-for-profit-colleges-and-universities.html">Higher Education Act was reauthorized in 1972</a>. Students attending for-profit institutions could be treated just like students at other institutions. They could now get grants and subsidized loans to pay for their tuition. </p>
<p>But, like other institutions that wanted access to this federal money, the for-profits had to agree to <a href="http://thomas.loc.gov/cgi-bin/cpquery/?&dbname=cp112&sid=cp112uqnjG&refer=&r_n=hr177.112&item=&&&sel=TOC_38109&">state, federal and accreditor oversight</a>. </p>
<h2>Accessing aid</h2>
<p>Over the last half-century, more and more for-profits have participated in the federal aid programs. They were attracted to the program, even with the additional oversight, because they could enroll more students and make more money.</p>
<p>There are currently about 3,400 federally funded for-profit colleges and universities in the U.S., <a href="http://nces.ed.gov/programs/digest/d14/tables/dt14_105.50.asp">according to official statistics</a>. This is compared to about 2,000 public institutions and 1,800 nonprofits. All of them need to meet
standards of their accreditors, the states they operate in and the U.S. Department of Education. </p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/125983/original/image-20160609-7054-yiezbt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/125983/original/image-20160609-7054-yiezbt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/125983/original/image-20160609-7054-yiezbt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/125983/original/image-20160609-7054-yiezbt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/125983/original/image-20160609-7054-yiezbt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/125983/original/image-20160609-7054-yiezbt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/125983/original/image-20160609-7054-yiezbt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">For-profits rely on federal aid.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/armydre2008/7714200766/in/photolist-cKFi8u-dB3GVB-9kFZh4-3cjrwC-edZStq-5vxVyF-dQCx2Y-k1H7g-8fmgar-4N3XZy-5vSvLu-5y1hEV-nauXNC-5AByeQ-9Nv8dj-5z8Fwo-ontV22-5zhjCN-pDZsh8-4HYGCQ-4HWXEh-pVykUz-5zd2gK-5CAN1U-kmwscx-521iyP-kmwfRX-kmywpW-3kWApz-9NEYMC-5vNbG8-m5pYEi-7RsNQH-9eVrd5-5DgLde-oQrz1m-5zhj4Y-qL5DSN-dv5tUF-mk1sF6-pVSaUu-c7E7if-8Aya3d-aFuhBZ-kmwm2r-5ABxCh-nEz8i-5zd2cK-kmwmD8-5AxiFe">frankieleon</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>That students can get grants and take out loans distinguishes for-profit higher education from other businesses – like Trump University – that may claim to educate students. This aid is supposed to serve the <a href="http://eric.ed.gov/?id=ED525737">public purpose</a> of higher education as being vital to the nation’s well-being and not simply facilitate the pursuit of private profit.</p>
<p>Student aid is also what provides the focus for regulating higher education. There are specific requirements called “<a href="http://www.higheredcompliance.org/resources/program-integrity-rules.html">program integrity</a>” rules that these institutions must follow in order to justify their receipt of student aid. The rules involve how institutions advertise their programs, recruit students and prepare graduates for employment. It is these rules that are causing difficulty for many for-profit institutions.</p>
<h2>What’s going wrong</h2>
<p>For example, one of the rules involves what is known as “<a href="http://www2.ed.gov/policy/highered/reg/hearulemaking/2009/compensation.html">incentive compensation</a>” for student recruiters. For-profits are not allowed to pay employees based on how many students they managed to enroll at the institution or how much financial aid they were successful in getting for students.</p>
<p>In 2002, the Bush administration modified this rule. This came about after a <a href="http://chronicle.com/article/For-Profit-Colleges-Praise-a/13510">former lobbyist</a> for the Apollo Group, which owns the University of Phoenix, a for-profit institution, was put in charge of higher education policy. The changed rule specified 12 “<a href="http://www.gao.gov/new.items/d10370r.pdf">safe harbors</a>” that would not be considered violations. These exemptions allowed for raises to be given to recruiters and other staff as long as there was some <a href="http://www.finaid.org/educators/20100426incentivecompensation.pdf">justification for pay</a> other than enrollment increases.</p>
<p>For-profits took advantage of these loopholes to aggressively recruit students. <a href="https://nces.ed.gov/programs/digest/d15/tables/dt15_303.20.asp?current=yes">Enrollment</a> increased by 150 percent over the next seven years. </p>
<p>Subsequently, in response to <a href="http://www.nacacnet.org/issues-action/policy/Documents/brief_incentivecomp.pdf">reports of abuse</a>, in 2011, Obama’s Department of Education closed the loopholes. Following this policy change, enrollment at for profits declined by <a href="https://nces.ed.gov/programs/digest/d15/tables/dt15_303.20.asp?current=yes">at least 20 percent</a>. </p>
<h2>Dependence on financial aid</h2>
<p>It is important to note that for-profit higher education is dependent on federal dollars to survive. For-profits are not directly subsidized by states like public institutions. And they don’t discount their tuition like nonprofit institutions. Instead they ask students to pay the full cost.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/125985/original/image-20160609-7096-2wp6pf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/125985/original/image-20160609-7096-2wp6pf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=605&fit=crop&dpr=1 600w, https://images.theconversation.com/files/125985/original/image-20160609-7096-2wp6pf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=605&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/125985/original/image-20160609-7096-2wp6pf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=605&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/125985/original/image-20160609-7096-2wp6pf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=760&fit=crop&dpr=1 754w, https://images.theconversation.com/files/125985/original/image-20160609-7096-2wp6pf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=760&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/125985/original/image-20160609-7096-2wp6pf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=760&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">For-profits need federal dollars to survive.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&searchterm=student%20loan&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=315781718">Dollar image via www.shutterstock.com</a></span>
</figcaption>
</figure>
<p>As a consequence, most institutions get more than 70 percent of their <a href="https://studentaid.ed.gov/sa/sites/default/files/fsawg/datacenter/library/6302014summary.pdf">revenue from federal aid programs</a>. The government prohibits for-profits from getting more than 90 percent of their revenue from government grants and loans. </p>
<p>But oddly, money from veterans’ programs is not included in this calculation. Since these programs are funded from the Department of Defense rather than the Department of Education, they were not part of the Higher Education Act rules. If all government funding was included, <a href="https://www.insidehighered.com/news/2014/10/13/more-profit-colleges-would-fail-9010-rule-if-veterans-benefits-are-included-analysis">many more institutions would cross the 90 percent threshold</a>. </p>
<p>Changing this loophole is on the congressional agenda. But it is being vigorously opposed by the for-profit lobbyists.</p>
<p>The current for-profit reliance on federal money means that the federal government is the primary customer of for-profit higher education. And the one who pays sets the rules.</p>
<h2>Fraud accusations</h2>
<p>To be clear, none of these are issues that suggest for-profits are fraudulent institutions. They are mainly about how for-profit institutions recruit students and whether the jobs students get with a for-profit degree are worth the expense. There are other criticisms connected to their eligibility for federal aid programs.</p>
<p>Nevertheless, <a href="http://link.springer.com/article/10.1007%2Fs12115-012-9541-0#page-1">accusations of fraud</a> have dogged for-profit higher education. The biggest case was the collapse and bankruptcy of <a href="http://www.huffingtonpost.com/2015/05/04/corinthian-colleges-bankruptcy_n_7205344.html">Corinthian Colleges</a>. Corinthian had over 100,000 students at its peak, with almost 100 campuses across the country. </p>
<p>But the federal government <a href="https://www.insidehighered.com/news/2014/06/20/major-profit-chain-faces-bankruptcy-feds-turn-heat">restricted access to student aid</a> in 2014 out of concern that Corinthian was mishandling funds. Later proof of false advertising resulted in a <a href="http://college.usatoday.com/2016/03/25/former-corinthian-colleges-to-pay-over-1b-for-defrauding-students/">billion-dollar judgment</a> against the company. </p>
<p>Because of this, former Corinthian students are <a href="https://studentaid.ed.gov/sa/about/announcements/corinthian">now eligible for debt relief</a> for the loans they took out to attend. </p>
<h2>Why Trump U is different</h2>
<p>Coming back to the initial question, here’s what’s different about Trump University: To begin with, Trump University is not an <a href="http://chronicle.com/blogs/ticker/that-time-donald-trump-started-a-university-and-an-amazing-blog/102305">accredited</a> institution. In fact, New York authorities insist it was <a href="http://www.newyorker.com/news/john-cassidy/trump-university-its-worse-than-you-think">breaking the law</a> by calling itself a university. </p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/125986/original/image-20160609-7079-f0jzat.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/125986/original/image-20160609-7079-f0jzat.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=567&fit=crop&dpr=1 600w, https://images.theconversation.com/files/125986/original/image-20160609-7079-f0jzat.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=567&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/125986/original/image-20160609-7079-f0jzat.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=567&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/125986/original/image-20160609-7079-f0jzat.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=713&fit=crop&dpr=1 754w, https://images.theconversation.com/files/125986/original/image-20160609-7079-f0jzat.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=713&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/125986/original/image-20160609-7079-f0jzat.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=713&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">One commentator’s view of Trump U.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/notionscapital/27129606980/in/photolist-HkmjYu-29RVSQ-6wi1we-rfoE5g-rab8n9-rack4W-egjotY-rfowUp-qBVFpX-ryBcrg-rrCR64-rh8ytf-74WPMw-quLeWJ-rrD5cp-rabazA-rh8vMy-rh9xv3-dbSGwx-vMQG5J-8mrygx-cZCKDf-b3Ga9B-quYbLF-cZCLdh-racdFW-cZCJDS-dMg6xj-rpsGhE-rrKB7T-rrD7HM-b3FTCx-rrKFJD-daAsHS-8REDAp-x8oowR-92vnXu-rWKnwC-nQ72U-rWJfw5-segL58-rWHUgf-d1TE27-d1TE81-czTNoy-rWJ8Bd-d1TE5m-8EByBJ-aexKrR-c8cbaC">Mike Licht</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Without approval from the state or oversight from accreditation agencies, students at Trump University couldn’t get federally backed grants and loans. And because it wasn’t part of the federal aid program, none of the program integrity rules applied.</p>
<p>With no federal money at risk, Trump University is simply a case of what New York Attorney General Eric Schneiderman called <a href="http://www.cnn.com/2016/06/02/politics/eric-schneiderman-attorney-general-trump-university-fraud/">“straight-up fraud.”</a> The case is being brought under laws that apply to any business.</p>
<p>Essentially the institution is accused of <a href="http://www.newyorker.com/news/john-cassidy/trump-university-its-worse-than-you-think">running a scam</a> where free classes were used to lure in customers for expensive seminars that promised to reveal Trump’s secret of real estate investing. In reality, there were no secrets, only high-pressure sales tactics used to sell <a href="https://www.washingtonpost.com/news/answer-sheet/wp/2015/08/08/trump-university-why-the-n-y-attorney-general-called-it-a-scam/">expensive seminars</a>. </p>
<p>Most for-profit colleges and universities, however, are not accused of fraud. They are in the cross-hairs primarily because they rely on government money to survive. And for-profits could eliminate much of the scrutiny if they dropped out of the federal aid programs. </p>
<p>Trump University doesn’t have that option. Even if Trump dropped out of the campaign for president, the trouble with his university would remain.</p><img src="https://counter.theconversation.com/content/60585/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Kinser does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>For-profit colleges and universities have been in a lot of trouble. But the case of Trump University is different. To start with, it cannot even be called a for-profit university.Kevin Kinser, Associate Professor of Education, University at Albany, State University of New YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/599262016-05-26T01:24:03Z2016-05-26T01:24:03ZTrump’s higher ed proposals could leave poor students out of college<figure><img src="https://images.theconversation.com/files/123850/original/image-20160524-25213-1vnpqrd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What will Trump's higher ed plan mean for students?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/gageskidmore/5440990018/in/photolist-9hNuLJ-9hHrVT-9hKraP-9hKpmZ-9hKoVK-9hLwdw-9hKpTt-9v62wo-eULu15-e47mhL-e41GKR-e41EUk-e47k59-e47jUm-e47hqo-e41ELr-e47i8s-e41GhK-e47hS1-e47hxW-e47kUu-e47mPN-e47jAC-9hNvKd-e41Jw8-sc2gdA-segL58-rWJfw5-cJjFP-e47hHh-rWKnwC-kNDYwa-9VQfNH-kNFjPw-g25GLQ-5nrmkz-dpHmsu-g1XPzf-g25NZH-c8zKr7-9hgBjx-9CtYNw-e7BGMN-9nkVU5-c8cbaC-rpJw2x-d5X6uS-6mtZaz-aSA4wt-emNEdj">Gage Skidmore</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>What is happening, or what should be happening, on college campuses has rarely, if ever, been a topic of the remarks of Donald J. Trump, the presumptive presidential nominee for the Republican Party.</p>
<p>The <a href="https://www.donaldjtrump.com/issues">“Issues”</a> section of his website has only this related to education: “I will end common core. It’s a disaster.” And this is accompanied by a 51-second video expanding on this theme. </p>
<p>However, recently, Trump’s campaign co-chair and policy director, Sam Clovis, gave an interview to an education website, Inside Higher Ed, <a href="https://www.insidehighered.com/news/2016/05/13/trumps-campaign-co-chair-describes-higher-education-policies-being-developed">that outlined</a> what a Trump presidency could mean for the <a href="https://nces.ed.gov/programs/digest/d15/tables/dt15_317.30.asp">nation’s 6,000 colleges</a> and universities, and its <a href="https://nces.ed.gov/programs/digest/d15/tables/dt15_303.10.asp">over 20 million</a> post-secondary students. Clovis is a <a href="http://webs.morningside.edu/business/facultypages/clovis.html">professor of economics at Morningside College</a>, a small private institution in Iowa, who is currently on leave in order to work for the campaign.</p>
<p>The major theme that emerged from the information he provided was that as president, Trump would improve student success by reforming the federal student loan program in two ways: 1) change the student loan program so as to provide more incentives for colleges and universities to enroll students who will be successful and earn enough money upon graduation to pay back their loans; and 2) to return the federal loan program to its pre-Obama status by having the loans come from private lenders, rather than the federal government.</p>
<p>I am a provost and a researcher of education economics. And here’s what some unintended consequences of these proposals would look like.</p>
<h2>Incentivizing colleges to enroll successful students</h2>
<p>First, let’s look at the proposal to change the student loan program so that rather than the federal government being the sole guarantor of publicly provided and guaranteed loans, the higher education institutions themselves would share in the costs if a student defaulted. </p>
<p>This idea has been floated fairly widely recently, most notably by <a href="http://www.slate.com/blogs/moneybox/2015/06/12/elizabeth_warren_and_student_loan_risk_sharing_should_colleges_pay_a_fine.html">Senator Elizabeth Warren</a>, a politician most people would expect to have little in common with Donald Trump.</p>
<p>The logic behind this idea is that if colleges were at least in part responsible for making good on a defaulted student loan, they will be better incentivized to enroll only those students (or at least those carrying federally guaranteed loans) who are likely to graduate from the institution and get a job that will provide a high enough salary to enable them to pay back the loans. </p>
<p>While this may seem good in concept, in practice it would be very difficult to implement. And here is why:</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/123852/original/image-20160524-25236-1cblizq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/123852/original/image-20160524-25236-1cblizq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/123852/original/image-20160524-25236-1cblizq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/123852/original/image-20160524-25236-1cblizq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/123852/original/image-20160524-25236-1cblizq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/123852/original/image-20160524-25236-1cblizq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/123852/original/image-20160524-25236-1cblizq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Can colleges predict who will succeed?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/jirka_matousek/8468745497/in/photolist-dUmwZp-dQZnke-az8Zy7-dUqX47-pVzkT1-4eorj6-brUftj-cdtiF3-brU99y-5oGQ6t-cdtiGw-dR5U2j-rwdnPm-oKMmoR-dQV9Cg-9Kpwwj-dj1C31-dUmq72-iiUd8i-hShXaJ-e4hhNr-dRLHNd-fqsd1h-isqBd1-5v3gqp-8H6wDG-dQWsnH-dRLFqd-fqcN7g-dR4kbG-nCMWpy-dewUp8-dQWAqX-bsi9on-iiTUuy-5v7B7G-nhubJQ-oNsGaD-dRPrs2-4msxSN-bw86is-onGX6-dRMdk7-dRY1Kd-dUssDo-efWWyn-9VAPa4-e6Cmp6-nKHFLJ-cdtged">Jirka Matousek</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The challenge is that it is extremely difficult for colleges to know, or even predict with much certainty, which students will achieve this level of success. </p>
<p>For the most part, we are talking about 17- and 18-year-olds, and it can be very difficult to know which of them will graduate and earn enough money to pay back their loans, even when universities have information about their academic background.</p>
<p>The <a href="https://nces.ed.gov/programs/digest/d14/tables/dt14_303.45.asp">most recent data</a> from the U.S. Department of Education show that 69 percent of all undergraduates in 2013 were 24 or younger. And the great majority of students applying to college for the first time are coming directly out of high school.</p>
<p>An unintended consequence of such a requirement would be that institutions would be more likely to shy away from enrolling students from disadvantaged families, and those whose academic preparation was weaker. <a href="http://trends.collegeboard.org/student-aid/figures-tables/grants#Pell%20Grants">Over a third of all undergraduates</a> receive Pell Grants, the federal assistance program for students from low- and moderate-income families.</p>
<p>Such a move would exacerbate the <a href="https://nces.ed.gov/programs/digest/d15/tables/dt15_302.30.asp">large gaps in college enrollment</a> and degree attainment that already exist in this country. It would lead to <a href="https://www.census.gov/hhes/www/income/inequality/index.html">even higher rates of income inequality</a> across income and racial groups. </p>
<p>Every year, thousands of students graduate from college and go on to successful careers who, at first glance when they were graduating from high school, may have looked like risky investments. </p>
<p>Another impact of this proposal is that it could lead to a <a href="http://www.nytimes.com/2013/10/31/education/as-interest-fades-in-the-humanities-colleges-worry.html">further deterioration</a> of liberal arts education, as colleges may deemphasize majors that are seen as not having strong labor market prospects. Some politicians, <a href="http://www.huffingtonpost.com/2011/10/12/rick-scott-anthropology-major-daughter-jobs_n_1007900.html">including Governor Rick Scott</a> of Florida and even President Obama, <a href="https://www.insidehighered.com/news/2014/01/31/obama-becomes-latest-politician-criticize-liberal-arts-discipline">have questioned</a> whether liberal arts degrees are worth the investment. </p>
<p>But data from the Association of American Colleges and Universities have demonstrated that over the long run liberal arts graduates <a href="https://www.aacu.org/press/press-releases/new-report-documents-liberal-arts-disciplines-prepare-graduates-long-term">earn as much</a> as many with more technical degrees.</p>
<h2>History of student loans</h2>
<p>Now let’s turn to the issue of loans through private lenders. Since the passage of the Higher Education Act of 1965, which first authorized widespread student loan program, banks have played a key role in the system.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/123851/original/image-20160524-25213-z55pjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/123851/original/image-20160524-25213-z55pjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/123851/original/image-20160524-25213-z55pjm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/123851/original/image-20160524-25213-z55pjm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/123851/original/image-20160524-25213-z55pjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/123851/original/image-20160524-25213-z55pjm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/123851/original/image-20160524-25213-z55pjm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Who will be left behind if loans are given by private lenders.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&searchterm=student%20loan&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=410840608">Dollar image via www.shutterstock.com</a></span>
</figcaption>
</figure>
<p>Banks originally provided all the capital, and because the loans were guaranteed by the federal government, it became a lucrative business for them. But in 1993, during the first Clinton administration, a <a href="http://atlas.newamerica.org/federal-student-loan-programs-history">federally originated student loan program</a> was created. This was done as an attempt to lower the cost of borrowing to students by removing some of the banks’ profits.</p>
<p>Between 1993 and 2010, bank-originated and federally originated student loans coexisted, with the federal share <a href="http://atlas.newamerica.org/federal-student-loan-programs-history">no more than one-third of the volume</a>. During President Obama’s first term, however, he signed legislation that removed banks from the federal student loan program entirely, shifting all of the loan origination to the federal government.</p>
<p>The rationale behind this legislation, signed in 2010, was to take away the profits earned by banks, and instead reinvest them in the federal Pell Grant program, which provides direct assistance to college students from low- and middle-income families.</p>
<h2>What about disadvantaged students?</h2>
<p>Trump’s proposal is certainly consistent with his business-based, free-market approach to government. As Clovis said in his interview, “We think it should be marketplace and market driven.” </p>
<p>While the question of whether the banks or the government should provide student loans may be a political one, there are large fiscal implications of shifting back to a bank-based system. </p>
<p>At the time the 2010 legislation passed, the Congressional Budget Office had estimated that the federal government would <a href="http://chronicle.com/article/A-Year-After-Bank-Based/126927">save almost US$10 billion per year</a> that had been going to banks in the form of loan subsidies and fees. </p>
<p>That money came to be invested in funding for the Pell Grant program rather than going to bank profits.</p>
<p>A return to a bank lending system for student loans could potentially reduce levels of Pell Grant funding, unless Congress (along with the next president) is willing to appropriate more money. </p>
<p>Any reduction in Pell Grant funding would have a similar effect as Trump’s proposal: it would reduce college access and graduation rates for poorer, African-
American, Latino and Native American students. And that would lead to increased gaps in educational attainment between these groups and students from more advantaged families. </p>
<h2>A complex system</h2>
<p>The truth is that higher education policy is not quite as simple as it may appear to an outsider. </p>
<p>The interaction of federal and state policies, along with the actions of the thousands of colleges and universities that are funded by governments as well as students, creates a complex system in which it is often difficult to encourage some behaviors without creating other problems.</p>
<p>The high cost of college along with the high volume of student debt have received much attention from both groups in recent years. There has been an absence of detailed proposals in this arena from Trump’s campaign up until now. His slogan of “Make America Great Again” implies returning to some bygone era. </p>
<p>But for higher education, a return to that era would mean that fewer students are able to go to college, and poorer and racial minority students have fewer educational opportunities.</p><img src="https://counter.theconversation.com/content/59926/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Donald E. Heller does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What will a Trump presidency mean for America’s 6,000 colleges and universities, as well as its over 20 million postsecondary students?Donald E. Heller, Provost and Vice President of Academic Affairs, University of San FranciscoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/586972016-05-06T00:59:10Z2016-05-06T00:59:10ZAre income share agreements a good way to pay for college?<figure><img src="https://images.theconversation.com/files/121435/original/image-20160505-19877-1nne22h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Income share agreements work quite like federal loans.</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&searchterm=student%20loans&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=406924213">Student debt image via www.shutterstock.com</a></span></figcaption></figure><p>Millions of Americans are struggling to pay for college. Nearly 10 million students and their families took out <a href="http://trends.collegeboard.org/student-aid/figures-tables/total-federal-and-nonfederal-loans-over-time">almost US$100 billion</a> in student loans from the federal government in the 2014-15 academic year, pushing outstanding student loan debt to <a href="https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2015Q4.pdf">more than $1.2 trillion</a> by the end of 2015.</p>
<p>The traditional way to repay student loans is to make the same monthly payment each month for 10-20 years, similar to how mortgages work. But this isn’t always the best setup for students, particularly as college doesn’t always pay off immediately in terms of increased earnings. </p>
<p><a href="https://collegescorecard.ed.gov/">Newly released government data</a> show that many students are having difficulty repaying their loans after leaving college. <a href="http://www.brookings.edu/blogs/brown-center-chalkboard/posts/2015/09/30-default-rates-student-loan-kelchen">About 40 percent of students</a> had not been able to pay any part of the principal within three years of entering repayment.</p>
<p>A new idea in paying for college in the United States is <a href="http://www.aei.org/publication/investing-in-value-sharing-risk-financing-higher-education-through-income-share-agreements/">Income Share Agreements (ISAs)</a>, in which students agree to pay a percentage of their future income to a private company or lender in exchange for additional money to cover college expenses.</p>
<p>What is an income share agreement and is it a viable option for students?</p>
<h2>ISA and past efforts</h2>
<p>ISAs function similarly to certain types of federal loans, which allow students to tie their student loan payments <a href="https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven">to their income</a>. </p>
<p>However, the amount that undergraduates can borrow under income-based repayment plans isn’t always enough to pay for college. The typical college student straight out of high school <a href="https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized#how-much">can borrow only $31,000</a> from the federal government for college with a <a href="https://studentaid.ed.gov/sa/types/loans/interest-rates">current interest rate of 4.29 percent</a>. This means many students may need to turn to expensive private loans as an alternative. </p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/121437/original/image-20160505-19848-12dvbsj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/121437/original/image-20160505-19848-12dvbsj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121437/original/image-20160505-19848-12dvbsj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121437/original/image-20160505-19848-12dvbsj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121437/original/image-20160505-19848-12dvbsj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121437/original/image-20160505-19848-12dvbsj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121437/original/image-20160505-19848-12dvbsj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Technically, ISAs are not loans.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=pBVffAc_dCxi_Bk8l7us3w&searchterm=income%20share%20agreement&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=139400726">Pie chart image via www.shutterstock.com</a></span>
</figcaption>
</figure>
<p>And here is where an ISA can help. Technically, ISAs are not loans since students don’t have to pay any money back if their earnings are not adequate. This means that if students don’t make money, they could pay back less than what they took out in loans. Instead of interest rates, lenders offer students contracts with the percentage of future earnings paid to the ISA provider and the time period based on a student’s major, year in school and amount borrowed. </p>
<p>ISAs have been <a href="https://www.aei.org/wp-content/uploads/2016/03/Students-Future-as-Investments.pdf">in use in Latin America</a> for more than a decade with providers such as <a href="http://www.lumniusa.net/about/our-story">Lumni</a> financing the college educations of thousands of students. In the United States, there have been a few small efforts to introduce ISAs, but they have largely been unsuccessful. </p>
<p>In 2014, Senator Marco Rubio (R-Florida) and Congressman Tom Petri (R-Wisconsin) <a href="http://www.edcentral.org/rubio-isa-bill/">introduced legislation</a> for an income share repayment option, with a <a href="https://www.nasfaa.org/news-item/5226/Congressmen_Introduce_Bipartisan_Income-Share_Agreements_Bill">similar bill introduced in 2015</a> by Representatives Todd Young (R-Indiana) and Jared Polis (D-Colorado). Lawmakers in Oregon too have been <a href="http://www.oregonlive.com/politics/index.ssf/2015/06/pay_it_forward_tuition_program.html">pushing a similar program</a> called Pay it Forward. However, none of these attempts worked.</p>
<h2>Purdue plan</h2>
<p>More recently, in a first-of-its-kind development, Purdue University launched an Income Share Agreement plan “<a href="http://www.purdue.edu/backaboiler/index.php">Back a Boiler</a>” (originally “<a href="http://www.pbs.org/newshour/rundown/a-new-spin-on-college-financing-treating-students-like-stocks/">Bet on a Boiler</a>”) program to help juniors and seniors pay for college. This name plays on Purdue’s mascot of the Boilermaker, a vehicle outfitted to look like the 19th-century steam engines that boilermakers built throughout the country, which fits the STEM-heavy university well. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/121436/original/image-20160505-32474-b5vx7r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121436/original/image-20160505-32474-b5vx7r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121436/original/image-20160505-32474-b5vx7r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121436/original/image-20160505-32474-b5vx7r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121436/original/image-20160505-32474-b5vx7r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121436/original/image-20160505-32474-b5vx7r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121436/original/image-20160505-32474-b5vx7r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Purdue is introducing an income share agreement plan.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/boilermakerwes/3608669237/in/photolist-6uTnD8-scM26x-bZ6Rc3-gwoeJT-5R9yEd-6uTpQi-565QJz-73iFio-2Vwo4A-bZ6RMw-5R9yHS-6uXxDA-m6trKi-84gDu6-akws84-ekorWb-47HRm4-4H71W-bZ6Qyy-565QG6-56a2Mu-4oT9gV-bZ6S8w-5R9yN5-4oTf5n-4oXcYU-7sQRYN-4oT9mV-8cfYYW-akzgzG-4H71K-bZ6SZW-4oT9DK-8mFCKS-scLxGe-bZ6PNA-bZ6QTJ-4oXiBS-4oXdcU-c2msod-CemV1-8bkLuP-qSCCdp-CemVc-4H6ZK-4H6ZU-CemV8-CemV5-esN5ys-8cfZtE">Wes Jackson</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Under the Purdue plan, students would be offered a contract that would specify, based on their major, what percentage of their earnings would be paid and for how many years. Students can receive money to cover any remaining financial need after grants and scholarships, with payment terms based on the total amount of money needed. </p>
<p><a href="http://www.purdue.edu/backaboiler/comparison/index.html">For example</a>, a student majoring in biological engineering and expecting to graduate in 2018 would pay 3.32 percent of her income to Purdue for 96 months after graduation in exchange for $10,000 today, while an elementary education major would pay 4.97 percent of his income back for 116 months after graduation.</p>
<p>Students who make less than $20,000 per year will not need to pay anything back. Their maximum lifetime payment is capped at <a href="https://www.washingtonpost.com/news/grade-point/wp/2016/04/11/at-purdue-student-aid-based-on-future-earnings-could-revolutionize-college-debt/">2.5 times</a> the initial amount of money provided.</p>
<h2>One size does not fit all</h2>
<p>Although some students could benefit from ISAs, they certainly aren’t for everyone.
So, who should consider income share agreements?</p>
<p>In my view, income share agreements make the most sense for three groups of students. </p>
<p>First, students in need of additional funds beyond federal loans should consider ISAs as a potential option. Second, since ISAs are technically not loans, they may appeal to students who are particularly averse to taking on debt to pay for college. Loan aversion <a href="http://eric.ed.gov/?id=ED503684">is particularly common</a> among minority and first-generation students. So a product that doesn’t come with fixed payments might benefit these students.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/121438/original/image-20160505-19836-z0nzst.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121438/original/image-20160505-19836-z0nzst.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121438/original/image-20160505-19836-z0nzst.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121438/original/image-20160505-19836-z0nzst.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121438/original/image-20160505-19836-z0nzst.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121438/original/image-20160505-19836-z0nzst.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121438/original/image-20160505-19836-z0nzst.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Not all students can access federal loans.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/40969298@N05/13011103465/in/photolist-kPKiL6-e6DGm6-bUwAKq-k1Mf2E-q8je5T-fkXVPM-kPL7Rg-5R4Had-az7Dwv-4Dzcg-kPKWcR-atfUnv-gkYUtB-2idQr-4DzbJ-bUxELo-axKor4-kNUjHV-kPMfe1-bUxLXd-gkZv7n-bUxGv3-4DzbX-cRKrr3-edSxgW-azVGar-bUxipw-au6yR4-gkZf7W-bUxqm3-bUwTE3-bUxbvA-nbyyap-bUxfrG-bUxNyu-bUxuVh-kPKoGD-bUxRgC-bUx93J-bUxBQd-cyvLBN-bUxDsA-bUwSgG-bUxdto-bUxnEG-3f8UMV-bUxk7u-bUwQ89-bUwRcG-bUx3eb">PROJoe Brusky</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>Finally, not all students can access federal loans. About one million students attend community colleges that <a href="http://ticas.org/content/pub/what-cost-how-community-colleges-do-not-offer-federal-loans-put-students-risk">do not participate</a> in the federal student loan program. Federal loans also aren’t available for educational opportunities such as <a href="https://www.law.umich.edu/financialaid/Documents/bar.pdf">bar exam prep for law students</a> or “boot camp” courses designed to teach students particular skills outside the traditional college setting. </p>
<p>ISAs might be particularly well-suited to these types of programs that are closely tied to employment.</p>
<h2>Not for high-income earners</h2>
<p>Who might not be the right fit?</p>
<p>Students who don’t need to borrow beyond the $31,000 in federal loans for a bachelor’s degree are better off with federal loans.</p>
<p>This is particularly true for students who plan to work in public service fields and could benefit from the federal government’s <a href="https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service">Public Service Loan Forgiveness</a> program, that can forgive debt not repaid after 10 years. The terms for ISAs likely aren’t as favorable, as private lenders may offer students contracts of longer than 10 years in order to at least break even. The 40 percent of students unable to pay down the principal on their loans are unlikely to get terms as good as with federal loans. </p>
<p>Students who think they’ll make a lot of money after college may not want to consider the ISAs either. ISAs require students to pay a fixed percentage of their income. So, they can be an expensive proposition for students who do really well even if the terms are better than for other majors. </p>
<p>These students would be better off taking on federal and private loans and then consider joining the growing number of students <a href="http://www.bloomberg.com/news/articles/2015-06-10/student-loan-refinancing-boom-could-cost-u-s-taxpayers-billions">who are getting their loans refinanced</a> by a new generation of private lenders, who are willing to give borrowers with successful careers loans on lower interest.</p>
<p>In theory, ISAs have a market, but whether students take up this new product will determine its success.</p><img src="https://counter.theconversation.com/content/58697/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Kelchen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In income share agreements, students agree to pay a percentage of their future income to a private company or lender in exchange for additional money to cover college expenses. Are they for everyone?Robert Kelchen, Assistant Professor of Higher Education, Seton Hall UniversityLicensed as Creative Commons – attribution, no derivatives.