Purdue University has announced its intent to create a new plan to help students pay for college that would use investment to draw on students' future earnings, calling it "Bet on a Boiler."
Last week, Purdue Research Foundation announced it was looking for a partner firm that would not only create but also manage income share agreements as an alternative to federal student loans.
Under the agreement, a student's tuition would be covered by drawing from an investment pool. The student then agrees to have a portion of his or her income after graduation forfeited for a certain period of time. Payments would adjust based on income rather than accruing interest. All payments would stop at the end of the contract period regardless of how much money had been paid back.
"I've just been struck that this is a true debt-free financial aid," Purdue President Mitch Daniels said in a phone interview Thursday. "And as I say, it's a way of working through college after college, and that it might be a useful addition to a portfolio of (financial aid) options."
Students would only be required to make payments if they earn over $18,000 per year. Any payments they do make cannot amount to more than 15% of their income for 15-year contracts, or 7.5% for 30-year contracts. Students must be made aware of how their payments would compare to a loan for the same amount of money and length of time.
"It's a concern that people could be taken advantage of if the appropriate regulatory framework is not in place," said Beth Akers, a Brookings Institution fellow who focuses on higher education finance.
Daniels added that income shares may gravitate toward those pursuing a STEM degree because these students have more employment opportunities and higher salaries directly following graduation. He added that the idea would benefit all students once the market works itself out.
"I think the market would make this available to every student," he said. "The student would have to decide whether the terms seem attractive or don't."
He also said that while students who take out loans have no ability to bargain, income share agreements "will be completely negotiable." However, this also means that students with weaker and fewer job prospects could gain a contract with less favorable terms.
"It could prove very popular or not," he said, "and I'm sure whatever the initial arrangements, they will evolve and improve over time."
Student debt across the nation is reaching upwards of $1.3 trillion, with the average student graduating this year owing $33,000.
The effort came about after the Purdue's Class of 2015 was named the most indebted in United States history.