The Corner

Education

How Income Share Agreements Are Better than Government College Loans

(Jonathan Drake/Reuters)

It’s too bad that Uncle Sam ever got into the college-financing business. The feds have no constitutional authority to lend money to students (or anyone else) and millions of students have gotten themselves deeply in debt for education of dubious value. Easy federal loans were essential in fueling the “college for everyone” movement that has raised the cost and degraded the educational value of earning a degree.

Often people speak of college as an “investment” but the money for it isn’t invested in any real sense. No person or group evaluates the likely costs and benefits of college for a particular student and then decides if it makes sense or not. The feds simply dish out the funds and if the student can’t later pay, taxpayers suffer the loss.

But there is an alternative that actually involves investment analysis, namely Income Share Agreements (ISA). In today’s Martin Center article, Mary Claire Anselem of the Heritage Foundation discusses this eminently sensible approach.

“Federal loans,” she writes, “give students a false sense of value when they receive the same federal loan regardless of where they go or what they want to study. An ISA, by contrast, would make it very clear to students that certain courses of study are more lucrative than others. Students can only benefit from a more transparent system where earnings potential is factually discussed.”

Purdue University is leading the way toward ISAs, with its “Back a Boiler” program. The school covers the cost of the student’s education, but the student agrees to pay Purdue back based on his or her earnings after graduation.

I wonder if ISAs will ever replace federal loans — we are very bad at undoing huge policy blunders like that — but we’d be much better off if they did.

George Leef is the director of research for the John William Pope Center for Higher Education Policy.

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