View of State Street at Purdue University after snowfall.

Purdue University is testing out a new form of financial aid—an income share agreement (ISA)—in an attempt to help its students pay for their degrees without having to take on massive amounts of debt.

This is just one step that Purdue has taken over the years to try to help their students pay for school. Since Mitch Daniels took over as the University’s president in 2013, he has implemented tuition freezes, lowered room and board costs, and partnered with Amazon to reduce textbook costs for students. As a result, he has cut student borrowing by 23 percent.

Another one of the moves on Purdue’s radar was finding a partner to work with on providing ISAs to its students according to The Student Loan Report. ISAs refer to funding used to cover a student’s college costs; similar to an IDR plan, graduates agree to pay back the money as a portion of their income. The main difference is that an ISA is interest-free.

While ISAs have always been between private investors and students, the Purdue endowment is supplying the money—as well as taking on the risks in this case. The Purdue Research Foundation expanded the program earlier this year with the endowment; additionally, Purdue managed to partner with Vemo Education to help expand their ISA coverage.

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If a student is unable to obtain a job after graduation or earns less than $20,000 annually, the college would not collect any money. But if a student goes on to make a lot of money, Purdue will get back up to 250 percent of the original amount.

If a student decides to move on to graduate school, unpaid internships, join the Peace Corps, stay home to take care of their child, or anything else, then payments will be deferred for four years. One big advantage of ISAs, and a big difference from traditional loans: ISA money does not accumulate any interest during the deferment period.

Yale University tried the ISA approach in the 1970s, with less than stellar results. But experts say that was more about how the school implemented it. For many, a college or university taking on this type of risk is proof that it believes in its programs and the future of its graduates.

Many institutions are showing interest in following Purdue’s lead, especially after observing its success. Such observations also open the door for students to take advantage of these funding opportunities. In a report covered by The Student Loan Report, it was found that over half of parents and prospective college students would prefer an ISA over a private student loan.

Image Copyright © John Feister