Subscribe to Here’s the Deal, our politics newsletter for analysis you won’t find anywhere else.
Thank you. Please check your inbox to confirm.
College graduation can be a time of financial anxiety. But Purdue University is offering students a new way to pay for their degrees: Students get funding when they agree to pay back the university a percentage of their future earnings, which Purdue's president sees as an investment. Hari Sreenivasan reports as part of our Rethinking College series.
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.
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.
This year, Purdue began funding students who agreed to pay back the university a percentage of their future earnings.
Georgia students drop out with high debt despite state surplus
We're so very, very proud of you.
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.
Unlike student debt, it shifts the burden — or the risk, I should say — entirely from the student to the investor.
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.
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.
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.
Will Nelligan, who helped create Purdue's ISA model, explained how the agreements work.
Freedom from debt. You don't have a fixed amount that you need to repay, there's no interest attached to it.
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.
Proponents of income share agreements say universities haven't been held accountable for graduates who fail to repay their loans.
I think it would be a good thing if schools were more, had more, as they say, skin in the game.
In 2016, 11 percent of the nation's former students defaulted on federal loans.
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.
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.
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 —
In exchange for an additional $30,000 from Purdue, Gillbanks agreed to share 5 percent of her future earnings for 10 years.
Would you have done an income share for the whole thing if you could have?
So, it's what you do your spare time.
Build a Thor hammer.
Gillbanks is a digital design engineer, and feels pretty confident she'll land a good salary.
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.
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?
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.
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?
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.
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?
The answer was no.
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.
Purdue also sets a minimum income threshold. If, in the future, you are out of work, or earning very little, you don't pay.
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.
Is it a good investment for the university?
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.
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.
Watch the Full Episode
Support Provided By:
Additional Support Provided By: