This Viewpoint is part of an ongoing series, “Building a brighter future: Big ideas for postsecondary education.” In this series, we ask innovators what could make a difference to learners in 2021 and beyond.
Steven Taylor is a senior fellow on postsecondary education at the Charles Koch Institute. In 2019, he founded ED2WORK® to help postsecondary institutions and employers address the critical needs of adult and working learners.
Nationally, student-loan debt now totals $1.7 trillion. Adjusting for inflation, tuition has increased 238 percent between 1980 and 2016, outpacing rising health-care costs in the same period.
What should be done? Cancelling student-loan debt or providing free community college will not solve the root cause of surging cost. Nor will income-driven repayment incentivize institutions to drive down education costs. But innovative financing models like income-share agreements (ISAs) could make a positive difference.
The core of these agreements is that an education provider or a funder agrees to cover the cost (fully or partially) of the program in exchange for a portion of the student’s post-graduation income. This is usually around 10-15 percent of the graduate’s salary in a three-year period, only if the graduate earns an agreed-upon minimum salary (like $50,000).
ISAs and similar risk-sharing arrangements between students and institutions could have several positive benefits:
Removing barriers: Upfront risk-sharing arrangements remove the financial barriers to entry into post-secondary education that disproportionately impact low-income learners and students of color. Students are responsible for paying back the cost of their education only if they realize a positive employment outcome, as anticipated at the program’s start.
Focusing on outcomes: Providers and faculty are incentivized to design programs with value and relevance in mind and ensure the learning experience leads to gainful employment.
Controlling cost: Making government the primary payer by increasing federal student aid or making college free misses the opportunity to try new approaches that incentivize institutions to cut marginal costs (recent research suggests federal student aid is driving up tuition prices). For many students, the promise of a postsecondary education is that it will lead to better job prospects. Risk-sharing finance models would provide better signals regarding the utility of a credential in the marketplace, so educators can make the trade-offs necessary to deliver on that promise.
ISAs or upfront risk-sharing models are not the panacea to our cost and debt problems, nor are they likely appropriate across all of postsecondary education. But the success of current alternative financing models suggests that they should be considered as more than a niche solution with limited potential.
We need to focus on better, more sustainable approaches to post-secondary education finance, and that means addressing misaligned incentives. Since the Great Recession in 2008, state higher-education funding has generally declined, pushing more of the costs to students by way of tuition increases paired with federally subsidized borrowing. Ultimately, students bear the brunt of our poor solutions to date. While Caucasian students borrow a larger share of the cumulative loan debt, students of color experience greater hardships in repaying their student debt compared to other racial and ethnic groups.
The current system leaves far too many students saddled with untenable student debt while college costs rise out of reach for too many. Now is the time to consider alternatives.
The Charles Koch Foundation partners with social entrepreneurs to drive societal progress through academic research and innovations that help all learners realize their potential. Read more about the Foundation’s support for education.