Student Debt: Tuition Aid in Exchange for Investing in the Future
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What is the main topic discussed in this episode?
This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm J.R. Whalen in New York. One of the first real-life lessons in finance for college students is paying off their college loans.
What are Income Share Agreements (ISAs) and how do they work for students?
But savvier students can take their financial knowledge a step further, paying a percentage of their future earnings in exchange for a company or investor to pay off their college loans. helping them up front with their tuition costs. It's called Income Share Agreements, or ISAs, and the idea is gaining popularity in the U.S. And MarketWatch's Jillian Berman is with us to explain. Now, Jillian, can you first just briefly explain the money flow in both directions here?
Yeah.
How does repayment vary under ISAs based on expected future earnings?
So what happens is investors, companies, and sometimes even universities will provide students with tuition money up front to help them pay for college. And then the students pay it back as a percentage of their income after they graduate. So students who are expected to earn a lot of money will typically pay back a smaller percentage of their income over a shorter period of time. So, for example, a chemical engineer maybe pays And students who are expected to earn less money will pay back a larger percentage of their income over a longer period of time, someone like an English major. But the hope is that the obligation will be relatively similar because you've calculated the repayment obligation sort of based on their specific circumstances.
And it creates a kind of a relationship between the student and a company. It could be a good recruiting tool for companies down the line, right? Yeah.
Yeah. So some companies are considering using it as a way to pay for employee training. So instead of a lot of companies do offer now, you know, some tuition assistance for workers. But this some companies think could create, you know, sort of more a little bit more of an obligation to the company and also ensures that the company gets the money back for the tuition, even if the employee decides to leave after getting the training.
And this is good news for families who are really facing the mounting, rising costs of higher education.
Yeah. So a lot of families, you know, are very debt averse. So they don't like the idea of taking on a traditional student loan.
Can companies use ISAs as recruiting or employee-training tools?
They're worried about, you know, what happens if my kid graduates and they don't get a good paying job? You know, how are they going to pay back this loan? So something like an ISA allows for a little bit more security. This way, you know, parents and students know that they'll only be paying back a percentage of their income. they won't be saddled with a huge loan payment if they don't get a good job that can help them pay that back.
All right. And it's really, it's not for everyone because federal student loans are already pretty generous.
Right. So federal student loans offer a lot of benefits already. The interest rates are pretty low. In a lot of cases, they're subsidized by the government. So that's usually going to be a first best option for most students. The other thing that federal student loans offer is they do allow you to pay them back as a percentage of your income. So that's one of the benefits of ISAs. A federal student loan offers something similar. But a lot of students cannot pay their entire tuition just on federal student loans because there's a maximum to how much you can take out. So those students turn to private loans or their parents take out a federal student loan on their behalf. And an ISA can be a good alternative to those products because those products don't have the same protections as a federal student loan or the same great payment arrangements.
All right. We're speaking with MarketWatch's Jillian Berman about income share agreements, or ISAs, and you're listening to Your Money Matters from The Wall Street Journal. Thanks for listening, everyone. Now, Jillian, it's a great idea, these income share agreements, or ISAs, but there are some critics who say that it's not really the best solution. The best solution here is for colleges to rein in their own tuition costs up front.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:02–0:17
2
What are Income Share Agreements (ISAs) and how do they work for students?
0:17–0:41
3
How does repayment vary under ISAs based on expected future earnings?
0:41–2:13
4
Can companies use ISAs as recruiting or employee-training tools?
2:13–7:20
Speakers
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