January 03, 2019
By Peter J. Taylor and Kevin James, Crain’s Chicago Business
In 2005, Barack and Michelle Obama, in their 40s at the time, announced they were almost done paying back their student loans—nearly 20 years after graduating from college. Some Americans were shocked, but the Obamas’ story is common: Both grew up in low-income families and as the cost of college continued to rise, they increasingly relied on loans to finance their education.
Considered the “great equalizer,” higher education is the key out of poverty for students from underserved, low-income backgrounds, and is the gateway to family-sustaining jobs. Yet the rising cost of tuition, fees and expenses puts a college education out of reach for students with fewer economic means.
To cover college expenses, many students have turned to loans (both government and private) and are amassing more debt than previous generations.
The average 2017 college graduate owed $39,400, and recently, the total debt owed by students surpassed $1.5 trillion. The impact is most severe on low-income Americans: 12 years after graduation, 91 percent of students from low-income backgrounds still have student loan debt, compared to 59 percent of their wealthier peers.
These challenges have led some critics to question the value of a college education and its return on investment. Given that 65 percent of jobs will require at least some postsecondary education in just two years, the question shouldn’t be “Does college matter?” but rather, “How do we make it more accessible, affordable and equitable?”
Some education pioneers are turning to a potential solution—income-share agreements (ISAs)—which are employed in several Latin American countries. While the concept isn’t new (it was first introduced more than 50 years ago by Nobel Prize-winning University of Chicago economist Milton Friedman), the application of the model in the United States is. Only a handful of universities, including Purdue University, and coding boot camps are experimenting with them.
With ISAs, students receive financial aid in exchange for a defined share of their post-graduation income. Unlike loans, there is no principal to repay or interest to accrue, and there are thresholds and caps on the student’s ISA payments.
ISAs are contingent on income. When students struggle financially, their payment obligation is negligible or nonexistent, and when they thrive, their payment obligation scales with their success.
Better Future Forward is spearheading efforts on ISAs and working to level the playing field for low-income students. In 2017, BFF launched pilot programs in Minnesota and Washington, D.C., and is currently scaling its efforts to the Chicago area with support from ECMC Foundation and two local Chicago foundations.
BFF will collaborate with several Chicago-based college success organizations (Bottom Line, One Goal, One Million Degrees and College Possible) to serve roughly 60 Chicago students attending four-year universities in Illinois. These organizations will also provide ongoing wraparound support like college mentorship and coaching.
Eventually, BFF plans to grow the program so that every low-income student in Chicago has access to ISAs. And while the philanthropic sector can drive innovation by seeding new interventions, to make a system that works for all students and solve the student loan crisis, we need participation from businesses, policymakers and the public.
It’s time to think outside the box. To make college costs more affordable and equitable, we need to test innovative financing solutions.