Student loan repayment continues to be an issue with a recent WSJ article noting that 43% of borrowers are either behind or postponing their payments. One university, Purdue, is employing a pilot program to combat this by offering Income Share Agreements (ISAs) to their students. Often referred to as human capital contracts (and originally proposed by economist Milton Friedman), college students receive funds for college and agree to pay a percentage of their future income over a given term.

As for how these arrangements are structured, the school takes into account the student’s major and their expected salary upon graduation (I think this is an incredibly important linkage for high school students to make):

A senior studying mechanical engineering, one of Purdue’s most popular majors, could get $15,000 in return for a commitment to pay 4.23 percent of his or her income for a bit less than eight years. Purdue estimates that the engineer would have a starting salary of about $56,000, and will be making monthly payments of $200. In that hypothetical situation, the student would eventually repay a total of $20,647.

But an English major can anticipate a starting salary of $34,000, by Purdue’s calculation. For that student, the school would offer a different package, which might require a higher percentage of income over a longer period.

Your students can play around with the school’s comparison tool which compares these income-sharing arrangements vs. PLUS or Private Loan.

A few questions for students:

• How would this arrangement be considered different from a student loan with income-based repayment?
• What were some of the reasons that companies who tried a similar human capital contract approach didn’t gain traction?
• What happens in situations where the individual fails to make payments on these contracts?
• This program is only available to juniors or seniors who will likely be more certain of their major. Would you seriously consider such a plan if it was available to you? Why or why not?
• What assumptions does the comparison tool make about future salary increases? Do you think this is realistic?
• What majors do you think have the highest expected salaries? lowest?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.