The Wrongologist

Just when you thought that there couldn’t be another scheme to further mess with college students as they embark on their post-college journey, along come Income Share Agreements (ISAs).

The ISA is a contract whereby an individual investor (or a fund) would agree to provide a student with a lump-sum payment to be used for education costs, in exchange for receiving a share of the student’s income for a fixed period (5-10? years). The repayment would most likely be structured as a dividend on a security, thereby allowing the investor to pay a lower tax rate than on interest income.

Individual ISA contracts would be pooled and sold to investors. These are the kind of contracts that could only flourish in our growing oligarchy.

We have a student debt bubble. Student debt has tripled in 10 years, now totaling more than $1.3 trillion, or more than the country’s total debt for credit cards, auto loans and any other category except for home mortgages. Student debt default rates are equal to those of the 2008 subprime housing loan crisis, and the debt continues to grow, up this year by an estimated 8% with an estimated average debt of $35k each. About 70% percent of students have graduated with debt this year.

And now, ISAs are the new idea to siphon off student debt into the private sector. WaPo reported on Friday that Purdue University signed an agreement with Vemo Education a Virginia financial services firm, to look into the use of ISAs to help Purdue students pay for their educations. In an earlier WaPo op-ed, Mitch Daniels, former Republican governor of Indiana and President of Purdue, said:

From the student’s standpoint, ISAs assure a manageable payback amount, never more than the agreed portion of their incomes…Best of all, they shift the risk of career shortcomings from student to investor: 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.

What a nice way to say “indentured servitude.” And universities get to keep raising tuition faster than inflation. Sounds like a real winner for Mitch and other Republicans.

The argument by the free-market types is that ISAs shift risk from the backs of students to the investors. If the student has not earned enough over the period of the agreement to return the original capital to the investor, the student would have no further money obligation.

Sounds good. But, why would the investors agree to fund any low-paying degrees? It is logical that they would look to fund only those who represented a low risk of achieving significant earnings in the initial 10 years of working. So they would want to finance medical and engineering degrees while leaving the social workers and teachers to public sector finance. If private sources (investment funds) are providing the money and setting the terms, then loans will only go to those who are most likely to be successful.

And, Mr. Market will tell us which degrees and careers are worthy.

The investment fund will have access to voluminous private data that will allow it to make a precise (nearly riskless?) ISA negotiation with the student, while students are likely to only have access to their University’s aggregate data on expected salaries by type of degree.

If there was any doubt that this is a neo-con approved idea, consider that Republican presidential candidate Sen. Marco Rubio (R-FL) and Rep. Tom Petri, (R-WI) proposed ISA legislation with a maximum contract length of 30 years and the share of income capped at 15%. This is touted by Sen. Rubio’s supporters as evidence of his “innovative ideas.”

Sadly this idea has been around since the 1950s, when it was first floated by conservative economist Milton Friedman.

One of the most significant factors in our uneven economic recovery since 2008 is how we’ve become beholden to the oligarchs. The gig economy has replaced permanent jobs. Wages have stagnated, and companies are motivated solely by returning money to shareholders, often through share repurchases.

Now, college students are supposed to provide another class of equity return for the investors. They are to syndicate themselves to “shareholders”?

It’s a sick idea, one that only the greediest among us would support.