28 July, 2018
Young people graduating from colleges and universities in the United States face increasing amounts of debt.
Some colleges however are now offering students another way to pay for their studies. They pay for a student's education in return for a percentage of the student's future salary.
Norwich University in the state of Vermont announced Tuesday that it will become the latest school to offer this kind of contract. The contracts are called "income share agreements."
Norwich's program is starting out small. It is mostly for students who cannot get other loans or those who are taking longer than the traditional eight semesters to finish their degree.
Lauren Wobby is the school's chief financial officer and treasurer. Wobby said, "Norwich University is committed to offering this new way to help pay for college in a way that aligns incentives and helps reduce financial barriers to degree completion."
With traditional loans, students pay back the amount they borrowed, with interest, until the loan is paid off. Students with income share agreements, however, pay the school a percentage of their salary for a period of time.
Those who support income share agreements say they give colleges a reason to help students find jobs that pay well after graduation. If students earn a lot of money, they can pay the college back sooner.
Income share agreements also seem less risky for students who get a lower-paying job or struggle to find work after graduation. If students are unemployed or earning below a set amount of money, they do not have to pay anything back.
Clare McCann is deputy director for education policy at the research group New America. She said, "Taking on the debt through a contract, where you don't take on a debt per se but instead will repay a portion of your future income, has a certain appeal to students when the concept is fully explained to them."
Possible problems with the agreements
McCann, however, said that providers of income share agreements need to be careful. They could face unexpected problems in how they choose students for the program. For example, schools could be accused of discriminating against students who choose lower-paying professions.
"This is one of the biggest differences between income share agreements and federal student loans," McCann said. "Federal loans offer the same terms to all borrowers."
Income share agreements are not a new idea. They were first proposed by Milton Friedman in 1955. Yale University experimented with the idea in the 1970s for a short time.
In the past ten years, technical training programs, such as computer-coding programs, have used income share agreements because trainees cannot get federal student loans.
In 2015, Vemo Education, in Oakton, Virginia, began working with colleges and universities to design financial programs based on income. The company works with nearly 30 public and private colleges and universities, including Norwich University.
Vemo's first partnership was with Purdue University. It began providing money for the school's "Back a Boiler" income share agreement program in 2016.
Andrew Hoyler, 22, graduated from Purdue last year with a degree in professional flight with the goal of becoming a pilot. Now, he is working as a pilot for American Airlines regional company, PSA Airlines.
"One of the biggest pros for the income share agreement was the fact that out-of-college pilots do not make a lot of money, especially looking at the costs for an educational program," Hoyler said.
The terms of the agreement, such as the length of the agreement and the salary percentage, can be different for each contract.
Hoyler is currently paying eight percent of his income. Since it can be difficult to predict what a student's future salary will be, it is also difficult to predict how much a student will pay back over time. However, most agreements do place a limit on the amount paid back.
Hoyler took out federal loans but said the income share agreement helped him avoid working several jobs while starting out last year as a flight teacher. Hoyler said he might pay more for the income share agreement over a long period of time as his salary rises, but he considers the choice worth the cost.
I'm Phil Dierking.
David Jordan reported this story for the Associated Press. Phil Dierking adapted the story for Learning English. Mario Ritter was the editor.
Would you feel rather take out a loan to pay for college or give up a percentage of your future salary? Write to us in the Comments Section or on testbig.com.
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Words in This Story
align - v. to change (something) so that it agrees with or matches something else
incentive - n. something that encourages a person to do something or to work harder
income - n. money that is earned from work, investments, business, etc.
per se - adv. by, of, or in itself — used to indicate that something is being considered by itself and not along with other things
portion - n. a part of a larger amount, area, etc.
pro - n. a reason to do something
salary - n. an amount of money that an employee is paid each year
semester - n. one of two usually 18-week periods that make up an academic year at a school or college