History of Income Share Agreements

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Mark Kantrowitz

By Mark Kantrowitz

December 1, 2019

Income-share agreements (ISA) have experienced a series of false starts since the early 1970s. Each attempt to implement income-share agreements has provided insights about what doesn’t work. Eventually, proponents will be able to eliminate most of the flaws, developing income-share agreements as an alternative to traditional student loans.

Nobel Origins

Proponents like to point out that income-share agreements have grand origins.

Milton Friedman, the Nobel laureate, first proposed the idea of human capital investments in 1955.

Human capital is an asset comprised of the experience, knowledge and skills of individual people. One can invest in human capital through education and training.

Milton Friedman proposed human capital contracts where one could invest in an individual person’s human capital by providing them with some initial capital in exchange for a percentage of their income for a period of time.

First Attempts at ISAs

Yale University implemented a cohort-based version of income share agreements, called the Tuition Postponement Option, from 1971 to 1978. After receiving many complaints from alumni, Yale University cancelled the repayment obligation for all borrowers in 1999.

A company called iempower (later My Rich Uncle) offered ISAs starting in 2000, but switched to making private student loans when it became clear that ISAs would be regulated like loans. Investors also had concerns over the cash flow characteristics of ISAs, since there was little historical data about how ISAs would perform over time.

Michael Robertson, founder of MP3.com, established an ISA called the Robertson Education Empowerment Foundation (REEF) as a revolving loan fund at UC San Diego in 2002.

ISAs and Usury Laws

A company called Lumni Inc. started offering ISAs in South America, starting with Chile in 2002, Colombia in 2005 and Mexico in 2007, before offering them in the U.S. starting in 2011.

Income-share agreements have been less successful in the U.S., in part because of state usury laws. This has lead to caps on the total payments under an ISA and limits on the ratio of total payments to the amount originally received.

Some proponents of income-share agreements have sought federal legislation to exempt income-share agreements from state usury laws.

More Recent ISA Developments

Curiously, the most successful income-share agreements in the U.S. have been tied to specific colleges and universities, as opposed to more general ISAs.

A company called Cumulus Funding started offering ISAs in 2011. They changed their name to Align Income Share Funding in 2017.

The Highlander student newspaper at the University of California Riverside introduced the FixUC proposal in 2012 to replace tuition and fees with an ISA. The proposal was never implemented.

13th Avenue Funding funded a pilot ISA at Allan Hancock College in California in 2012.

Vemo Education was founded in 2015 to implement ISAs and worked with Purdue University (Indiana) to introduce the Back a Boiler program in 2016.

Since then, Lackawanna College (Pennsylvania), Clarkson University (New York) and Norwich University (Vermont) have announced plans to introduce ISAs.

A good place to start:

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