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Income Share Agreements and Diversity

Bias by design

Photo of Shannon Holloway
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Income share agreements have been generating a lot of buzz, both for their model in  education financing and in their close association with tech boot camps that are ‘disrupting’ the educational system.

While income-based repayment options are available for traditional student loans, the main difference with an ISA is individualized negotiation of a deal between a student and an investor on the valuation of their human capital.

From The Brookings Institution:

“Income share agreements (ISA) function somewhat similarly to income-based repayment plans, as students pledge to pay a predetermined percentage of their annual income in exchange for funds to pay for college. However, unlike federal income-based repayment plans, the percentage of income and the length of the repayment period are negotiated between a private investor and the student instead of being the same across all students. Students who major in economically desirable fields, such as engineering and business, at top colleges are likely to get better repayment terms than students majoring in less-profitable but socially important fields, such as education and nursing, at more typical colleges.”

“This leaves two groups of students who are likely to be interested in ISAs. The first group is those students who are either attending colleges that do not offer their students federal loans (primarily for-profit colleges and community colleges), or those attending short-term training programs such as coding ‘boot camps’ that do not currently qualify for federal student aid. Something in the neighborhood of two million students attend these colleges and programs, which results in a fairly sizable market. However, all of these programs tend to be relatively inexpensive, meaning that the per-student profit for an ISA provider will be fairly small.”

So not only does a student, in most cases a teenager, have the responsibility of making financial decisions to pay for their education that can impact the rest of their life. They also need to be a savvy negotiator, putting women and people of color at a disadvantage.

“It is now well understood that negotiations can operate as powerful engines of inequality at work. Recent work shows that women and people of color frequently operate at a disadvantage in the negotiation process and fare worse in the results.” (Negotiating Workplace Equality: A Systemic Approach)

Income share agreements appear to be a financial product with bias inherent in its design.

What is a provocation or insight that might inspire others during this challenge?

So not only does a student, in most cases a teenager, have the responsibility of making financial decisions to pay for their education that can impact the rest of their life. They also need to be a savvy negotiator, putting women and people of color at a disadvantage.

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Photo of Amanda Rider

This is a fascinating very 'out of the box' idea Shannon - thanks for sharing! I'd be interested to see what the average ROI is for these ISAs, but I guess given they are privately negotiated that this info would be very hard to come by.

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Photo of Shannon Holloway

Thanks Amanda, I couldn't find any information on ROI but one company Pave states their average amount raised is $20,000 - page 692 from an article from the Vanderbilt University Law School:
http://www.vanderbiltlawreview.org/content/articles/2015/05/Human-Equity-Regulating-the-New-Income-Share-Agreements.pdf

The article includes a lot of helpful background information about similar agreements and suggestions for regulatory policies.

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