On Wednesday, Sen. Marco Rubio, R-Fla., and Rep. Tom Petri, R – Wis., introduced legislation that would establish a legal framework for investors to directly invest in the future earnings of individuals. The bill, the Investing in Student Success Act, would offer an alternative means for education funding or educational debt repayment without the need to secure additional loans.
With two-thirds of all bachelor’s degree recipients having some form of educational debt and with approximately $1 trillion in student loans currently outstanding, the question on how to ensure access to education in light of increasing educational costs has grown to become a major policy issue concerning the course of the nation’s future. Some, however, have come to believe that the approach Rubio and Petri are proposing may lead to greater disenfranchisement and a de facto system of indentured servitude.
The system in question — income share agreements, or ISAs — are contracts in which a student or a debt-repayment client offers to an investor a set percentage of his or her future earnings for a finite period of time. The repayment rate and period would depend on the amount initially received, but unlike a traditional loan, there are no set payments. If a recipient earned no income during the repayment period, there would be no expectations to pay at that time. Likewise, should a recipient’s income spike during repayment, the expected payment would spike accordingly. This creates a sense of risk, as the return on investment could be a complete loss or many times the initial investment.
“This concept is quite innovative in its approach to financing college,” said Petri, a member of the House Education and the Workforce Committee, in a press release. “These plans would help all students get the financing they need — including students from disadvantaged backgrounds — but without the anxiety that comes with traditional loans.”
ISAs — which were initially suggested 60 years ago by Nobel Laureates in Economics Milton Friedman and Simon Kuznets — are currently being offered by companies such as Upstart, Pave and Lumni. Rubio and Petri’s bill would set up lender and borrower protections, such as establishing the maximum length of a contract (30 years) and the income cap a lender can request (15 percent). However, many feel that turning someone into an actual investment dehumanizes that person and introduces the possibility of investors gaming the system for a higher return on investment.
Pave, for example, requires its applicants to have a credit score of at least 640. It also offers a floating repayment rate and period scale that is dependent on the applicant’s socioeconomic status, standardized test scores, grades and other considerations. Such actions give the impression that Pave and others are skimming the cream off of the top of the applicant pool. While an investor cannot force a borrower to do anything career-wise after the money has been disbursed, the investor can choose borrowers who will be more likely to obtain high-paying jobs and have financial security. Theoretically, this could mean that the investor could choose a man over a woman or choose to exclude certain socioeconomic groups for consideration. It may also lead students from certain schools to being preferred for ISAs over other schools.
Additionally, ISAs could be used as a recruitment and retention tool. For example, an engineering firm offers ISAs to potential engineering graduate students. As the firm will be receiving a percentage of these students’ incomes as repayment for the initial payment, the firm can offer these students a job with a salary higher than what competitors may offer. As there is a sense of obligation and investment now in play, such employees are theoretically put at a greater risk for unfair treatment or supervisory misconduct.
As of the publication of this article, there have been no reported cases of ISA discrimination.
Most damningly, as argued by Kevin Roose for New York Magazine, the acceptance of such a stop-gap measure — trading in a portion of one’s long-term earnings for a percentage of that total upfront — represents a desperation drawn from an economy that has not yet recovered for most Americans and in which “making do” has grown to be as acceptable as succeeding.
“It’s not exactly news that in the absence of a solution to the unemployment crisis, Americans have learned to cobble together various odd jobs to replace the full-time, benefits-included positions they once had,” Roose wrote in October. “What’s surprising is how permanent the so-called gig economy is turning out to be … [There’s] no sign of a slowdown in the creation of new and innovative ways for people to commit themselves to sub-optimal economic conditions, possibly for the rest of their lives.”
Rubio, who graduated from law school with nearly $150,000 in college debt and only recently paid it off with the publication of his 2012 autobiography, “An American Son,” regularly talks about the need to reform educational finance in speeches. However, on CNBC, Rubio admitted that ISAs will not work for everyone.
«My guess is that you will likely see this more often than not in a graduate level, people going into the STEM fields or medicine or some other profession where there is certainty for the investor that, that person is going to find a job and make sufficient money to make their payments,» he said on Wednesday.