A New Solution to the Student Loan Crisis: Income Share Agreements Augmented with Career Mentorship
With a headline number of $1.4 trillion and many university students graduating OR dropping out with debt, we are facing a crisis that we cannot see. It shows up in conversations with people who have loans or whose family members and friends have loans. It shows up in news articles like this one. By the way, most student loans are federal loans, so this crisis is reflected in taxpayer costs as well.
At MentorWorks, we are working on an alternative to student loans. An idea that has been becoming popular more recently is the concept of income share agreements, where your repayments are tied to your income rather than your principal. Income share agreements (ISAs) have started being used to finance higher education now in the U.S. Purdue University started an ISA fund for its students in the fall of 2016 and boasts more than 160 students having taken ISA financing to fund their education.
How does MentorWorks Income Share Agreement program work and how are they different from loans?
We see student loans as a two pronged problem: the repayment on student loans and lack of clear pathways to well-paying jobs to make those repayments. Student loans do not align the incentives of the lender to that of the student. The federal government or bank that provides loans does not necessarily help with finding a career. While that notion itself seems alien — why should your bank help you find a career, we will challenge it — why not?
Introducing the MentorWorks (MW) ISA program. The concept is much more than just financing. It stands for sharing good and bad times; and it is designed to help students to do really well in their career.
Here is how it works. Students take certain amount of their college financing need in the form of ISAs. These are NOT loans, but agreements to share a percentage of your future income for a certain period, usually 3–9 years. Also, the payments are capped at a maximum level. The big benefits of this: a) No co-signers required, and c) If your income falls below a certain level ($25,000), payments are set to zero as long as the student shows reasonable effort to get her career back on track (and MentorWorks will help with networks to get jobs!).
Career mentorship and networking
Since ISA investors do well if the students do well, they have a vested interest in seeing the students do well. MentorWorks provides a structured mentorship program and professional networks to individuals. Why does this matter? There is evidence showing that students getting mentorship and having connections have better career outcomes. According to a study in the Journal of Applied Psychology (Wolff and Moser, 2009), a greater extent of networking is associated with higher salary (correlation = 30%). According to another study, career related mentoring is associated with greater compensation, salary growth, and promotions (Allen, et al, 2004).
MentorWorks takes the mentorship program seriously. In fact, students attending more networking and mentorship sessions will get discounts on their repayment rates!
Things get even better over the long-term. If a student of the MentorWorks program agrees to mentor those coming after her, she gets additional repayment discounts, making the financing even cheaper for her. And she helps others!
Students graduating from this program and in good standing will have lifetime access to the network of contacts that students have access to. This can help one in terms of career development, career switching, and even potential references for graduate school. MentorWorks’ goal is to build a community, one that will provide support to each member throughout their professional lifetime.
Compare to loans
Loans make you pay a fixed amount while MW ISAs take into account your ability to pay, and provide professional, mentoring, and networking benefits that loans do not. Plus, MW ISAs are credit agnostic. Plus, when you default on student loans, you can be penalized by impacting your credit report. MW ISAs do not report to credit agencies if repayment is not made because of lack of income (or even significant out of pocket medical expenditures).
How students are screened?
Students are screened based on their future potential, not on their current credit. Students will be screened based on their academic performance, recommendations from professors, and a statement of career aspirations.
Is it costlier than loans?
If you consider the pure cost of repayment, then MW ISAs are cheaper than loans if you don’t have a job, low income, or extra-ordinary out-of-pocket medical expenditures. Conversely, they are more expensive when you have high income.
But this does not account for how the mentorship and networking program can enhances your income. At an income level of $50,000, an increase in annual salary of $600 (1.2%) makes the MW ISA comparable to a PLUS parent loan (interest rate currently at 7%). If you think that mentors and networks can help you get even higher paying jobs, then MW ISAs are cheaper.
A New Way to Look at Education Finance
Einstein said that the definition of insanity is trying the same thing over and over again expecting different results. So, we are trying something different. Can career-augmented ISAs be an improvement over loans? We think so and we are working hard to prove it.
About the Author
Karthik is the CEO and Co-founder of MentorWorks Education Capital as well as a tenured Associate Professor of finance at Northeastern University and a former angel investor with Launchpad Venture Group. His teaching and research in the areas of entrepreneurship and education finance has made him a go-to-resource and thought leader on education financing having published various articles on the subject. He has mentored many students and assisted them in securing meaningful internships and jobs. Reach out to Karthik at firstname.lastname@example.org.