ISAs: Towards an Outcomes-Driven Solution for the Student Loan Crisis
By Aidan O’Gara & Tess Michaels
Over the last decade, the Department of Education’s new College Scorecard dataset has unearthed the deep gravity of the student debt crisis facing our nation. The cost of tuition at four-year universities has more than doubled since 1990, and across the nation these rising costs have been borne by the 45 million students who now owe more than $1.6 trillion dollars in outstanding student debt. Rewarding careers on graduation remain a dream for most, with 43% of college graduates’ first job not requiring a college degree. These students then struggle to repay their student loans, with nearly 10% of undergraduate borrowers defaulting on their federal loans within three years of graduation. Meanwhile, disadvantaged students whose families cannot cosign a loan or pay their tuition out of pocket, struggle to stay in school at all; the most commonly cited reason for dropping out of school being the unsustainably high cost of tuition. The students left with student debt but no degree, and are three times more likely to default than students who graduate, stifling their early adulthood.
As rising student debt outpaces the earnings of college graduates, new solutions are required to keep higher education affordable.
Despite these failures of the current system for funding higher education, students continue to enroll in higher education in droves for one simple reason: College pays off, for most students. Young people with Bachelor’s degrees earn almost $20,000 more each year than students who only complete high school. Over the course of a forty year career, a study conducted at Georgetown University finds that the average net present value of an undergraduate degree after accounting for the costs of attendance is still over $700,000. Students fare even better in fields like healthcare and STEM which feature some of the fastest growing job markets anywhere in the economy. For millions of young Americans, the opportunity to go to college remains the best hope toward economic mobility and a cornerstone of their future financial stability. How, then, do we help students earn a beneficial education without the risk and burden of unmanageable debt? Stride Funding offers a particularly promising solution: Income Share Agreements. This idea, first proposed by Nobel Prize-winner Milton Friedman in 1955, views these as investments in human capital, equivalent to buying shares in a student’s earning prospects, where the dividends are contingent on future earnings.