An OBL is a financing tool that ties payments for education to success after school. With an OBL, borrowers agree to pay a small percentage of income for a fixed period after graduation — there is no set principal or interest that must be repaid. Outcome-Based Loans shift the risk of educational financing from students to funders.
If a borrower ends up at a low-paying job or, worse, unemployed, they are protected from unaffordable payments and spiraling interest rates. If a borrower is financially successful after graduation they pay relatively more, but will never pay in excess of the predefined payment limits.
Because payment levels are set based on a borrower’s income, Outcome Based Loans resemble income-driven loan repayment plans such as those used by the U.S. Department of Education. Unlike traditional student loans, OBLs do not require or involve:
- A fixed, principal balance (e.g., the original funding amount) that must be paid down
- Perpetual debt that lasts until the balance has been paid off
- Interest rates
- “Negative amortization,” a term that describes when the principal balance of a loan rises because the student’s payments are less than the interest due
- The use of student or family credit scores
Outcome-based loans will not replace traditional student/consumer loans, but will rather serve as an alternative model whose prevalence varies based on the application and the needs of a given customer segment.
For individuals who cannot easily bear the risk that a given higher education program will not deliver a financial outcome that offsets the upfront cost, or for individuals who can no longer access affordable loan financing for whatever reason, Outcome-based loans will serve as a critical alternative.
Outcome provides a full service platform to design and implement customized loan programs. At each stage of the process, we work with schools on program design, student experience, financial regulatory compliance, and the tools to launch and service a successful program.
We tailor every loan program we build to meet the specific needs of students and schools. Hence, every program will look different and all contract terms are flexible. However, these agreements generally include all of the following parameters:
Generally, this is the amount of tuition being paid by the loan.
Borrowers may be asked to pay a fixed percentage of their future income (e.g., 5%) or to make payments based on their incomes (e.g., pay $50 per month if their income is above $40,000/year, and pay $75 per month if their income is above $50,000/year). The important thing is that payments are progressive – and borrowers who earn more make larger monthly payments.
Payment Term (Required Number of Payments)
The maximum number of monthly payments a borrower will have to make. For example, many outcome-based loans require borrowers to make 48 monthly payments. If a borrower makes the required number of payments – the loan is considered repaid.
The longest amount of time a borrower will be obligated to report income and make payments. For example, a borrower might have to make 48 monthly payments (the Payment Term) within a period of six years (the Contract Term). After the Contract Term has concluded, the loan is considered repaid (regardless of whether or not the borrower repaid the Funding Amount or made the required number of monthly payments).
The minimum earnings amount that must be achieved for payments to be made (often set at $40,000/year).
Upper bounds placed on how much borrowers can pay in an outcome-based loan. These will generally include a cap on the dollar amount a student could repay (e.g., 1.5x the amount financed) and a cap on the APR that a student could pay (e.g., 5%).
Many factors contribute to a thoughtfully designed loan program that serves students and educators. Educators generally provide the some or all of the following data to assist in a tailored program design approach:
- Degree completion rates
- Career placement rates
- Starting salaries and longitudinal earnings for recent graduates
Whether schools can provide some or all of these metrics, we work to understand the needs of each program through data and qualitative collaboration.
Any data used in designing a loan program is held in strict confidence and used solely for the purpose of evaluating the program.
Higher education providers may choose to finance OBLs in several ways according to their needs, including:
- Social-impact funds
- Third-party investors
Each school selects loan participants differently. Some make financing available to all students who meet the requirements of the loan application. Some may require students to enroll in a career services program to qualify for funding. While others may make loan funding available to students only after they have completed certain degree requirements.
Yes. While outcome-based loans seek to eliminate need-based defaults, which arise when borrowers are simply unable to repay a financial obligation due to insufficient personal finances, borrowers enrolled in an outcome-based loan program may still default if they fail to uphold the terms of the loan.
While each outcome-based loan program is different, most include payment limits that cap the amount borrowers are required to pay either in a given year or in total. While the dollar amounts of payment limits vary from program to program, prospective borrowers should carefully consider these terms before taking out an outcome-based loan.
Payments are only due if a borrower is currently earning above the income threshold during the time period described in the OBL contract. If a borrower is not working or is earning less than the income threshold, their payment obligation is zero.
An OBL ends when any one of the three milestones below are reached:
- A borrower has made the required number of payments (i.e., completed the Payment Term)
- The amount a borrower pays reaches one of the Payment Limits
- A borrower has been under the loan contract for the full Contract Term