Income Sharing Agreements for college expenses

[projekt]

I was reading that there is a push for "Income Sharing Agreements" to become legally sanctioned. These would be a form of investment agreement in a student where the investor pays for college and the student promises a fixed percentage of income for a fixed period of time.

https://www.washingtonpost.com/opinions/a-different-solution-to-student-debt/2015/08/20/d2e140b8-37bb-11e5-9d0f-7865a67390ee_story.html

Proposed laws include terms ranging from 10-30 years and percentages ranging from 5-15%. In theory, if you were unemployed or vacationing or whatever, your payments would stop.

I wonder what the benefits and pitfalls of this approach would be, compared to other options, such as the current direct loan/PAYE system, or tuition caps and greater public funding of universities.

[lbmustache]

I don't know how I feel about this.

1) Because the risk is on the investor, they are only going to invest in people who have a high chance of earning $$$ jobs (e.g. engineering, medicine, etc.). Do people in these fields "struggle" with paying back student loans, or is it the liberal arts, humanities etc. majors?*
2) Investors are not stupid, this is a plan devised to make certain people money under the guise of "helping" others.
3) 10-15% of your income is a lot. $40k income, 15% is $6000, which is $500 a month. For 10-15 years? Is this really cheaper than a student loan?
4) Along the lines of #2, I feel like this is going to trap people who don't have an understanding of how finances/money work.   

Interested to hear what other Mustachians think.

*As someone who majored in a humanities field (w/ no debt) I agree that taking out massive loans for these fields is stupid. But, I do not agree with the current trend of these fields dying out.

[sol]

There were a handful of these stories on the web about a year ago.  They're basically adopting the model of a sports/entertainment agent, where they help you get in the door then take a cut of your future earnings.

The argument was that young people will work harder if they have a specific individual backing them, someone they want to impress, than if they are given a student loan by a faceless government agency.  And the investor presumably has ties in the industry and can help you get a job, or a least write you a letter of introduction.

It's probably a terrible idea for a typical working stiff, especially a successful one who is going to make a lot of money.  But for a Mustachian hell-bent on early retirement?  Sure, you can have 5% of my wages for the next 30 years, because I'm only going to work ten.

[MrsPete]

This has been in the works for some time -- I know I heard about it a year or so ago. 

I don't see it as any different than student loans.  Both schemes ask a young, naïve person to accept help today in exchange for repayment (plus interest) tomorrow.  Potential college students aren't particularly good at actually grasping how payback will affect their future lives, nor are their parents particularly good at helping them make good decisions on this front.  It's sadly true that all too many people "don't know how to money". 

Things I'm thinking:

- The repayment for a student loan seems more "certain" because you can figure up how much interest it'll cost, etc.  However, you can't know for certain how much you'll earn in the future, so you can't be sure how much you'll owe. 

- Will investors be able to choose whom they'll fund?  If so, will STEM majors find themselves with multiple offers, while music majors can't get any help? 

- What if you never work, or if you only work ten years as an above poster suggests?  Will the investor be able to fine you, or take you to court if you don't pursue paid employment?  How will non-paycheck compensation work?  For example, my future pension is worth as much as the paycheck I'll get next week.  If part of that pension is earned during the repayment timeframe, will the investor have any claim to that benefit? 

- We all know that student loans can't be discharged through bankruptcy, etc.  Will this new type of debt work the same way?  What happens if the new graduate won't pay or says he can't live on 85% of his salary?  Will this type of loan be as "forever" as a student loan? 

- I do not agree that college students will work any harder if a specific individual is backing them. 

- I wonder if repayment will seem "more real" to 18-year old students who are making decisions about borrowing.  Does, "You will owe 10% of your future salary for 10 years" sound more real than, "You'll make payments to the bank"?  I kind of think it does sound more concrete, easier to understand for the naïve young consumer. 

- If I were the recipient of such a loan, I would never for a moment think that the lender was "helping me".  I'd have understood -- even at 18 years old -- that he was investing and expected a return. 

- The writer is foolish to end the article by saying that this new plan may be the end of student debt.  It's just a new method of being indebted. 

Incidentally, this plan is a bit like England's student loans.  I'm friendly with a 21-year old English chap, and he says that their student loan program is -- to use his words -- unsustainable.  I can't remember all the details he shared with me, but essentially a college student can end up owing X amount of his future earnings; however, the loopholes are so numerous that the country's losing money on the program.  For example, some students -- like my friend -- are moving to other countries; the English government can't enforce their payments. 

[electriceagle]

Indentured servitude: whats old is new again.

[StockBeard]

Sure, you can have 5% of my wages for the next 30 years, because I'm only going to work ten.

Yup, I don't see a scenario where one side of the agreement isn't abusing the other. Either you're agreeing as a student to decades of "servitude", or you have a plan to game the system. Either way sounds unfair to me

[Vilgan]

I'm not sure 5% of income is servitude...

[Tyler]

Student loans leave you contractually bound to a bank for a fixed payment.

Corporate education programs leave you contractually bound to a company for a fixed amount of time.

Income sharing agreements would leave you contractually bound to another individual for a fixed percentage of your income.

I understand how the implied variable payment that always scales with salary may appeal to the student, and I get why some people are looking for different sources of income, but I personally wouldn't touch income sharing with a 10-foot pole.  Lending a large fixed amount of money up front with no guarantee of the cash flow you get in return seems like a bad idea to me.  Concentrating your portfolio in a single company is bad enough, and doing it in a single person seems downright reckless. 

And beyond that, it just seems like a tangled legal mess waiting to happen.  If you pay for someone's chemical engineering degree and they have kids and stop working to raise a family, you get no income from your investment.  I imagine many lenders will naturally use a gender filter to boost expected returns.  The inevitable gender discrimination lawsuits alone could get out of hand quickly. 

[ncornilsen]

Student loans leave you contractually bound to a bank for a fixed payment.

Corporate education programs leave you contractually bound to a company for a fixed amount of time.

Income sharing agreements would leave you contractually bound to another individual for a fixed percentage of your income.

I understand how the implied variable payment that always scales with salary may appeal to the student, and I get why some people are looking for different sources of income, but I personally wouldn't touch income sharing with a 10-foot pole.  Lending a large fixed amount of money up front with no guarantee of the cash flow you get in return seems like a bad idea to me.  Concentrating your portfolio in a single company is bad enough, and doing it in a single person seems downright reckless. 

And beyond that, it just seems like a tangled legal mess waiting to happen.  If you pay for someone's chemical engineering degree and they have kids and stop working to raise a family, you get no income from your investment.  I imagine many lenders will naturally use a gender filter to boost expected returns.  The inevitable gender discrimination lawsuits alone could get out of hand quickly.

Or they'll go after the spouse's income.  "you couldn't earn that money if my client wasn't staying at home, so it's unjust enrichment."

[Mississippi Mudstache]

Student loans leave you contractually bound to a bank for a fixed payment.

Corporate education programs leave you contractually bound to a company for a fixed amount of time.

Income sharing agreements would leave you contractually bound to another individual for a fixed percentage of your income.

I understand how the implied variable payment that always scales with salary may appeal to the student, and I get why some people are looking for different sources of income, but I personally wouldn't touch income sharing with a 10-foot pole.  Lending a large fixed amount of money up front with no guarantee of the cash flow you get in return seems like a bad idea to me.  Concentrating your portfolio in a single company is bad enough, and doing it in a single person seems downright reckless. 

And beyond that, it just seems like a tangled legal mess waiting to happen.  If you pay for someone's chemical engineering degree and they have kids and stop working to raise a family, you get no income from your investment.  I imagine many lenders will naturally use a gender filter to boost expected returns.  The inevitable gender discrimination lawsuits alone could get out of hand quickly.

Or they'll go after the spouse's income.  "you couldn't earn that money if my client wasn't staying at home, so it's unjust enrichment."

Yeah, this sounds like a god-awful idea. Who do you think is generally going to have the upper hand in these agreements: the naive, fresh-out-of-high-school 18-year-olds, or the wealthy master investor?

[iknowiyam]

This might be a good idea for parents or extended family instead of outright paying for school. The interest rates could be very low yet still give the student a sense of control and responsibility with finances.

[MrsPete]

Concentrating your portfolio in a single company is bad enough, and doing it in a single person seems downright reckless. 

Put that way, yes, it looks like a very risky choice.  Your investment could fail to graduate, become a theater major, become disabled, or even die. 

And beyond that, it just seems like a tangled legal mess waiting to happen.  If you pay for someone's chemical engineering degree and they have kids and stop working to raise a family, you get no income from your investment.  I imagine many lenders will naturally use a gender filter to boost expected returns.  The inevitable gender discrimination lawsuits alone could get out of hand quickly.

I hadn't considered that, but, yes, since statistically an average woman works fewer years than an average man, I can see why investors would skew towards the men.