For Some Students, There's A New Way To Pay For College

Apr 4, 2019
Originally published on April 4, 2019 7:06 pm
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For some students, there's a new way to pay for college. It's not alone. It's not a grant or a scholarship. As Jacob Goldstein from our Planet Money podcast reports, it's a bit like students are selling stock in themselves.

JACOB GOLDSTEIN, BYLINE: When Lauren Neuwirth went off to college at Purdue, her mom gave her $30,000. That was her college fund. Also, she got some government-backed loans, did paid internships in the summers. But all those things combined were not nearly enough to pay for school.

LAUREN NEUWIRTH: I went to financial aid. And I was like, I need some money or I'm joining the Army because I don't know what else to do. And school's like 30 grand a year.

GOLDSTEIN: Someone at the financial aid office told her about this new thing called an income share agreement. The way it works is someone gives money to a college student. In this case, the money came largely from Purdue's own endowment. And in exchange, the student promises to pay a specific percentage of her income for a set amount of time after graduation.

Neuwirth decided to take the deal. She's getting $50,000 from Purdue, and in exchange, she has promised to pay roughly 15 percent of her income for eight years after she graduates. After that, she's done with the payments no matter how much or how little she's paid.

So the more you make, the more you have to pay.

NEUWIRTH: Yes.

GOLDSTEIN: But also, the less you make, the less you have to pay.

NEUWIRTH: (Laughter) Yeah. But, I mean, we're hoping to make a good amount of money.

GOLDSTEIN: It's kind of like when a company sells stock. The higher the company's earnings, the more it pays its investors. Income share agreements have been used for years in Latin America. They're also popular with some vocational schools in the U.S., especially the high-tech boot camps that teach people to write code. But these agreements hadn't been tried at a big four-year U.S. university until Purdue's program launched in 2016.

To be clear, grants, scholarships and government-backed student loans are typically better for students than income share agreements. But for lots of students, including Lauren Neuwirth, those are not enough to pay for college. Students often wind up taking out additional private loans with high interest rates. For those students, income share agreements might be a good option.

So far, about 500 students have been funded through the Purdue program. And one detail of how it works is really interesting. The percentage of income that students have to promise to pay depends on what their major is. Here's why - Purdue wants students to pay the same amount on average, but different majors tend to earn different salaries. Mary-Claire Cartwright manages the Purdue program.

MARY-CLAIRE CARTWRIGHT: We know that a chemical engineer's traditional salary out of school is going to be different than, let's say, an English major.

GOLDSTEIN: English majors typically make less than chemical engineering majors, so English majors have to promise to pay a higher percentage of their income. Still, charging different rates for different tuition majors does feel sort of judgy. You know, most schools don't charge different tuition rates for different majors, they just set one average for everybody. That seems like an option for an income share agreement.

CARTWRIGHT: It is, but it would be one that might cause there to be more adverse selection into the cohort.

GOLDSTEIN: So you mean that if you average it out, all the English majors would say like, sure, that sounds like a sweet deal. And all that chemical engineering majors would be like, no thanks, I think I'm just going to take a loan.

CARTWRIGHT: Right, right, correct.

GOLDSTEIN: The first students in the program have already graduated. They're making payments. It seems to be going well. But really, it is too early to say how this is going to work. Still, income share agreements are spreading. More vocational schools are using them, and four-year colleges in Utah, Colorado, Pennsylvania and New York are all launching programs of their own. Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.