Purdue invests in students' futures with new model of financing

Education

Find all of our stories in our Rethinking College series

JUDY WOODRUFF: As students are heading back to campus, we kick off a special series we do each year on innovative ideas in higher education. It's called "Rethinking College." We start with a look at how one university is fighting the rising costs of tuition by investing in its students.

Hari Sreenivasan has our report. It's part of our weekly segment, Making the Grade.

HARI SREENIVASAN: College graduation, a time for celebration. But for those with student loans, it's also a time of financial anxiety, because the repayment clock just started ticking.

Last year alone, U.S. student debt reached $1.3 trillion. The average amount owed was $37,000 dollars.

The sobering statistics led Purdue University in Indiana to offer students a new way to pay for their degrees.

MITCH DANIELS, President, Purdue University: I just know you are bound for exciting places, great achievements, thrilling moments.

HARI SREENIVASAN: This year, Purdue began funding students who agreed to pay back the university a percentage of their future earnings.

READ MORE: Georgia students drop out with high debt despite state surplus

MITCH DANIELS: We're so very, very proud of you.

HARI SREENIVASAN: President Mitch Daniels says the new funding model, called an income share agreement, can be viewed as an investment, much like investing in the stock market.

MITCH DANIELS: Unlike student debt, it shifts the burden — or the risk, I should say — entirely from the student to the investor.

HARI SREENIVASAN: That's because the terms of the agreement, called an ISA, are made well before students launch their careers. So, even if a student ends up in a low-paying job, the pay-back percentage stays the same.

MITCH DANIELS: If the student's career doesn't pan out too well during those early years, then the student is not on the hook and the loss falls on the investor. The investor is banking on the fact student is going to do well. And they'll get their money back and maybe a little more.

HARI SREENIVASAN: In this case, the investor is Purdue's Research Foundation, which funded all 160 students who applied.

Throughout the year, Purdue sponsored workshops to explain income share agreements.

WILLIAM NELLIGAN, Jain Family Institute: We think education financing should be based on your potential.

HARI SREENIVASAN: Will Nelligan, who helped create Purdue's ISA model, explained how the agreements work.

WILLIAM NELLIGAN: Freedom from debt. You don't have a fixed amount that you need to repay, there's no interest attached to it.

HARI SREENIVASAN: Not having to pay interest caught the attention of Purdue junior Alek Ventorino.

ALEK VENTORINO, Purdue University Student: The worst fear is, even if I graduate and have a good job, because of the interest, it's not like you're just paying off a certain amount and it goes away. No, it's going to take many years.

HARI SREENIVASAN: Proponents of income share agreements say universities haven't been held accountable for graduates who fail to repay their loans.

MITCH DANIELS: I think it would be a good thing if schools were more, had more, as they say, skin in the game.

HARI SREENIVASAN: In 2016, 11 percent of the nation's former students defaulted on federal loans.

MITCH DANIELS: I personally think that it's been a mistake that universities, and ours included, are not at risk when a student doesn't pay back their student loan. I very much favor the accountability that would come from the school owning a little bit of the — taking a little bit of the hit.

HARI SREENIVASAN: This year, senior Melissa Gillbanks signed up for Purdue's ISA. Until last year, she relied on private loans to pay her out-of-state tuition.

(on camera): How deep in debt are you to —

MELISSA GILLBANKS, President, Purdue University: A lot. I think currently, my Sallie Mae loans are sitting at like 80K without — that's like without interest on top of that. You get to learn a lot of different types of manufacturing —

HARI SREENIVASAN: In exchange for an additional $30,000 from Purdue, Gillbanks agreed to share 5 percent of her future earnings for 10 years.

(on camera): Would you have done an income share for the whole thing if you could have?

MELISSA GILLBANKS: Absolutely.

HARI SREENIVASAN: So, it's what you do your spare time.

MELISSA GILLBANKS: Yes.

HARI SREENIVASAN: Build a Thor hammer.

MELISSA GILLBANKS: Yes.

HARI SREENIVASAN: Gillbanks is a digital design engineer, and feels pretty confident she'll land a good salary.

MELISSA GILLBANKS: I try not to think about it, because it's a little daunting, because I know I'm going to have a good job — well, OK, fingers crossed I'm going to have a good job.

HARI SREENIVASAN: Each agreement is different. The percentage of a student's future income and the number of years a student must pay back Purdue is based on how much money that student is likely to earn.

So, who are you going after? Are you going after the ones who are going to be engineers, doctors, lawyers, bankers?

MITCH DANIELS: Oh, yes. It's a common misunderstanding. But we had 70 different majors in the first cohort of 160 ISAs, and STEM graduates, all the way down to philosophy students and historians and so forth.

HARI SREENIVASAN: Critics argue that universities should not be in the business of making bets on financial outcomes based on fields of study. And, questions have been raised about how this could impact a student's choice of majors.

ADAM WILLIAMS, Purdue University Student: Wouldn't this kind of program push incoming freshman or sophomores to a more lucrative field? The earning potential of an art major just isn't that of a computer science major. So, do you think this income agreement could push students to pursue something that they're not interested in, simply because they can get funded for that major?

WILLIAM NELLIGAN: The way that we account is again in adjusting those terms, right? A more professional major might pay a smaller share of their income for a shorter period of time, and someone, say, an art history, to use your example, pays a slightly larger share for a longer period of time.

HARI SREENIVASAN: Senior Zach Meyer will pay a smaller percentage than fellow student Gillbanks, the design engineer. That's because Meyer is majoring in financial counseling and likely to have a lucrative career. For $10,000, he's agreed to pay 3.8 percent of his future income for 10 years. But before Meyer's signed, he had one question.

ZACH MEYER, Purdue University Student: If I'm making a lot of money, am I going to have to pay back just a ton of money?

HARI SREENIVASAN: The answer was no.

ZACH MEYER: They cap at two and a half times whatever you borrow, so the most I'll be paying back is $25,000. So, I guess it's not a big deal.

HARI SREENIVASAN: Purdue also sets a minimum income threshold. If, in the future, you are out of work, or earning very little, you don't pay.

WILLIAM NELLIGAN: What feels most important to you?

PURDUE UNIVERSITY STUDENT: The protection when times get tough, so that way if you are unemployed, rather than interest piling up, you're already struggling to get back on your feet, you don't need interest on top of that.

HARI SREENIVASAN: Is it a good investment for the university?

MITCH DANIELS: Well, we'll find out. Frankly, I'll be disappointed if this new instrument doesn't grow over time, so that it attracts all kinds of investors, people who see a chance, maybe to — yes, help a student, but also make some kind of a return.

HARI SREENIVASAN: This fall, Purdue University is expanding their income share agreement program from juniors and seniors, to incoming sophomores.

In Indiana, for the PBS NewsHour, I'm Hari Sreenivasan.

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