In 1955, Milton Friedman suggested that it would be better to finance higher education through equity than through debt. (That was well before the feds got into the student-loan business.) His idea was that investors advance the funds needed for college to students and then be repaid after they graduate and have an income stream. Friedman’s concept didn’t catch on, mainly because the federal government got into student aid under LBJ. As a consequence, college is now far more expensive, and many students have amassed large debts for their college years.
The Income Share Agreement (ISA) concept is still perfectly viable, and policy-makers ought to encourage it, while getting out of the student-loan business. In today’s Martin Center article, Jack Salmon of the Mercatus Institute explains why ISAs make sense and reviews some recent regulatory moves that cast a dark cloud over them.
Salmon writes, “Unfortunately, policymakers and federal regulatory agencies are moving in the wrong direction. Over the past year, the Consumer Financial Protection Bureau (CFPB) has targeted ISA providers for failing to provide disclosures and supposedly mislabeling ISAs by not referring to them as loans.”
The CFPB (of highly dubious legal validity, as a court recently ruled) is a meddlesome body that is no friend of market processes. It might desire to eliminate ISAs, which would inject some sanity into college financing.
I like Salmon’s conclusion: “Income Share Agreements might not be the cure-all solution to the many problems with our current system of higher-education financing, but they should certainly have a place in a diverse market. Policymakers should act to facilitate the growth of ISAs by establishing legal clarity and consumer protections. Attempts to quell the market for ISAs, or to treat ISAs as traditional loans, are counter-productive and will likely worsen the student-loan debt crisis by burdening students with risk and taxpayers with costs.”