Affordable university tuition is largely a thing of the past, as shown by the ever-rising, exorbitantly high tuition fees across public and private universities. Students exit university programs with an average debt load of $38,792, and often depend upon loans to keep them afloat. However, high-interest rates coupled with salary progression well below the pace of inflation equate to significant difficulty paying off student loans. It is no surprise, then, that nearly 6% of student loan debt in 2020 was near or in default.
Income-Sharing Agreements (ISAs) provide a compelling solution to this crisis. According to TechCrunch, “An ISA is essentially an equity alternative to private student loans. An investment fund — which could be the school itself — covers tuition for students in exchange for a certain percentage of their income for x many years after.” The value behind this financing method is that it aligns the motivations of the college (to make money off of the student) and the student (to gain credentialing and command a higher salary).
On the side of students, an ISA would provide an additional funding source to students who cannot afford the up-front cost of attendance, and more importantly, who are not eligible for conventional scholarships that require full-time attendance or other rigid criteria. This point is particularly important for those who come from a low-income background and cannot secure reasonable interest rates that would allow them to meaningfully change their situation. Also, ISAs would incentivize universities to prioritize student outcomes over up-front revenue. By tying the success of the student’s job placement to the money returned to the university, institutions of higher education would become more reliable investments. As one EdTech ISA CEO puts it, “we get paid only after the student gets placed, which means that it’s in [their] interest to make the student employable.”
On the side of higher ed institutions, securing a percentage of students’ future salaries could prove lucrative depending on student outcomes. Even outside of top-tier institutions, as with any investment portfolio, one or a few exceptional cases will drive the majority of returns. Furthermore, universities with high ROI and impact for their students (not necessarily elite pedigree) will be able to generate revenue above and beyond standard tuition. It is worth mentioning that institution-backed ISAs are safer and more preferable to private ISAs, which have low transparency and high exploitative potential.
Education ISAs are still rare; currently about 50 colleges in the United States offer one. However, the steady growth of startup activity in the space implies that ISAs are due to reach mass popularity. As a VC fund, education ISAs present an opportunity to be an early entrant to a space with potential for both substantial return and substantial socioeconomic impact.