Norwich University, a military institute in Vermont, recently announced an income sharing agreement as an alternative to student loans.
With student loan debt at an all-time high of $1.5 trillion, some schools are taking a different approach to their tuition rates. Instead of requiring an upfront tuition payment, they take a percentage of their students’ future salary.
Norwich University, a private military college in Vermont, is the latest school to adopt this practice. Lauren Wobby, the CFO at Norwich University, said in a statement that the school wants to help students overcome financial barriers to completing college.
This contract, referred to as an income share agreement (ISA), is being offered at the school on a limited basis. It will be available to students who have limited access to loans or are taking longer than four years to earn their degree.
Traditionally, students pay for their tuition at the beginning of the semester or quarter. Students who choose an ISA agree to pay the school a percentage of their future income for a period of time after they graduate. Proponents say this gives schools a greater incentive to prepare students to succeed in the job market.
Many students see this as a low-risk alternative to taking out student loans to pay for college. If they earn below a certain threshold they don’t have to pay anything back.
But some experts warn that providers may prefer recipients that pursuing degrees in higher-paying fields. Clare McCann, deputy director for education policy at the New America Foundation, told an ABC News affiliate that this is the biggest difference between an ISA and federal student loans.
"Federals loans offer the same terms to all borrowers," she said.
ISAs might be a new concept to many people, but the idea was first proposed by American economist Milton Friedman in 1955. It is a concept that has been offered by some technical programs for which students usually don’t have access to federal loans.
In 2016, Purdue University launched its Back a Boiler program, an ISA available to sophomore, junior, and senior students. The program is administered by Vemo Education, a private company that works with colleges to implement income-based financing programs.
The terms vary based on the individual’s major, but the average person is expected to pay more than the original amount of the ISA as their salary rises. However, some students feel that the trade-off is worth it if they are unable to cover the cost of tuition with federal loans and grants. And an ISA can help students avoid turning to private student loans, which have higher interest rates.
But similar to student loans, there are consequences for failing to pay back the ISA. The Back a Boiler program charges late fees on missed payments and has strong default penalties. Students that are considering participating in an ISA should make sure that they read all of the fine print first.