CPC Episode #24 - Treating Students as Stocks

Welcome to Episode 24 of the College Prep Confidential Podcast. This week, we’re talking about turning you, the college student, into a stock ticker symbol YOU, in an episode titled, Turning Students Into Stocks.

44.7 million Americans have student loan debt, according to a 2018 report by the Federal Reserve Bank of New York. The total amount of student loan debt is $1.47 trillion as of the end of 2018. To put this number into perspective, it's more than the entire credit cards deb. It's also more than the entire auto loans debt. The only debt level it's not surpassed is mortgage debt!

And some of the loans are crushing students, with New Delinquent Balances - Seriously Delinquent which means (90+ days) without a payment: The amount in jeopardy of defaulting... a whopping $31 billion.

More than 2 million student loan borrowers have student loan debt greater than $100,000, with 415,000 of that total holding student loan debt greater than $200,000.

The situation is volatile. Some people are getting desperate. Congress is screaming for reforms. The talking heads won’t stop throwing gas on the fire.

So what's the alternative. Is there a solution? is there hope?

A few years ago, a new alternative arrived on the scene. I nickname this option... "Treating students as stocks." I compare this to taking your initials, and making them a stock symbol, where "investors" will back your tuition in exchange for a promise to pay in the future. And it all started at Purdue University.

Purdue University became the first university to roll out a new payback method, called ISAs for short...

What is an ISA?

What is an ISA? ISA is short for income-share agreements, and they give you another option to help pay for college. With an ISA, students get money from investors and they agree to pay a percentage of their future income to those investors over a set period of time.

After a certain period of time, say 20 years, the student walks away from the obligation.

Commentary

Casey Jennings, a cofounder of 13th Avenue Funding, a California-based not-for-profit that is advising Purdue, commented “That’s not a bad piece of paper to own,”  “’I own GE, Ford, Apple, and yeah, I have this weird piece of paper that’s students at Purdue.’”

Personally, my college prep friends, I see this as like an academic draft. instead of athletes, we're essentially betting on and backing students. We're treating students as stocks.

A few Schools I've read about in the press that have ISA options:

• Purdue - Back a Boiler program
• Lackawanna College
• Clarkson University - limited availability
• Messiah College
• University of Utah
• Norwich University
• Colorado Mountain College

The New York Times had an article about the Lambda School. It's the first of its kind to offer students a paid education with an income share agreement upon graduation. The agreement says the following:

• Students must earn a minimum of $50,000 per year in order to begin collecting 17% of their income
• Total tuition gets capped at a maximum of $30,000 (i.e. no one would ever pay more than $30K total)
• What’s more, if graduates were NOT making at least $50,000 per year and did not find employment, they did not have to pay back the amount owed.

You'll see this with boot camps and training programs which don't qualify for federal aid. And for schools like these, they better have a solid program for training students to help them get jobs, or they will be out a chunk of cash after a few graduating classes.

Pros

if students earn low salaries, they pay little to nothing extra. plus, they get an education. Unlike loans, you benefit since the term period ends. it's not like a standard loan where it continues to accrue until you pay off the principal. Essentially, there's no "interest" on the loan.

I'm wondering if the companies who finance these loans help the students get jobs to ensure they get payment back. It's almost like a "you scratch my back, I scratch yours" type agreement. 

Some of these supplement your student loans. And you don't have to start paying on them until you get a job and start earning money. So you get a delay in the pressure to pay them right away.

it's in the school's best interest to help you build a college curriculum and get you exposure to get a job. What would happen if thousands of students had ISA's and then didn't get a job? The college or university would be out millions of dollars.

Removes risks for students. Instead of being on the hook for a loan even if college doesn't work out, the student only pays if they get a job after attending the college program.

If you quit or get fired, the ISA "pauses", and resume again only when you're working

• Most ISAs do have a minimum income requirement, so if you only are working minimum wage, you may not be required to make payments
• Most ISA's are capped at a certain payback. So unlike a loan which continues to grow interest if you don't pay or pay slowly, ISA's have a solid endpoint

You don't have to have a debate on whether to pay the minimum payment or fast pay. It's already predetermined. One less decision and worry for you each month.

Cons

Let’s talk about the cons in certain people’s eyes…

Sheriff Almakki, a member of Purdue’s student government, struggles with the concept: “The concern I had then and the concern I have now is that we are making higher education into more and more of a business model,” Almakki said.

This is on gross income, not net. So you're paying up front before expenses are taken into account.

You can end up paying far more than you borrowed, especially if you continue to get raises. I'm reading about people paying up to 2 times or 2.5 times their original loan via salary paybacks.

Will students not work as hard for raises and promotions if it means they have to give back more?

If employment placement rates are low, it places a bigger burden on the college, which means in the future, the tuition could be even higher for future generations.

Giving up a chunk of your future earnings. 

suppose you negotiate 5% off your salary each year. And suppose you start off at 75,000 each year, with an average 3% raise. here's the chart:

Now think about this, if the student invested this 5% in a 401(k) or low risk investment versus taking out a student loan, how much more or less would they have had? it all comes down to weighing the options.

The Marketplace for ISAs

There's even a marketplace for ISAs, for private investors, called Edly. So now, accredited investors can look at a pool of students, and decide to invest or not based on their background. Again, this is starting to shape up more and more like an educational draft.

On the Edly website, prospective investors can see information such as:

• school’s graduation rate
• average salary
• other variables provided by the institution

Schools can pool their ISAs by program, like STEM or humanities majors, or a cybersecurity program at a coding bootcamp. When investors find a pool of ISAs they like, they can purchase Edly notes, which represents a fractional ownership in an ISA.

But let's think about this... If we do the math, and we find out the highest paying degrees out there, do you think that these investors will only back STEM type degrees, doctors, lawyers, etc? And if so, what does that mean for the rest of the majors?

The Takeaway

ISAs you an alternative for college financing. It may be worth setting up the grid I talked about on an Excel spreadsheet or Google Sheet. And what you do is project your salary, future raises, and bonuses. Then compare the percentage you'd pay under an ISA versus what you'd pay for a student loan at a certain interest rate. Compare the pros and cons which we discussed, and make your decision from there.

Call to Action:

ISAs give you something to think about. And with college loans and financial aid, you want to get the best help available. Which is why I've reserved a special deal for you, the podcast listener. I work with a financial aid company who specializes in college prep planning. Financial Aid, FAFSA, the whole deal. And if you'd like, I've reserved a free strategy session with our certified college planning experts worth $250. For you, it's free. 

In this session, you'll discover college prep tips and tricks to help you plan for college. And if you like what you hear, and decide to book a full service college prep package, you'll have the financial aid piece done for you. 

And even if you don't continue on with our financial aid experts, you walk away with free advice, tips, and tricks to navigate the college prep planning process. To take advantage of this limited capacity deal, call 1-800-234-2933, that's 1-800-234-2933. And leave your contact information with my assistant. Mention the college prep strategy session, and we'll get you booked up for your free session.

Thank you for listening, and I'll see you next week.