Outcome-based loans
A new financing structure for education that makes obligation a function of outcome
How it works
An Outcome-based loan (OBL) is a financing tool that ties student payments for education to success after school.
With OBLs, students make payments linked to their future earnings for a fixed period after graduation.
OBLs have two key features:
- Borrowers only repay the loan when their income is above a predetermined level
- The obligation ends regardless of whether a borrower repaid the full principal amount
OBLs have three exit options:
- Number of required payments are made
(eg, 48 payments) - Contract term expires, regardless of the number of payments made
(eg, 96 months) - Payments limit reached, regardless of number of payments made
(e.g. Student hits the aggregate payment cap or an APR limit – caps can be as low as 1.0x the amount borrowed or a 0% APR)
Terminology
OBLs are a flexible form of financing. To better understand how they can be structured, here are a few key terms to keep in mind:
Income-based payment
The recurring payment, determined by the borrower’s income level, that borrower will be required to pay when they are earning more than the Income Threshold.
Income Threshold
Borrowers are obligated to make payments only when earning more than the Income Threshold. During periods when a borrower’s annual income is less than the Income Threshold, monthly OBL payments are suspended.
Number of Monthly Payments
The maximum number of monthly payments that borrowers are required to make as part of an OBL contract. Once borrowers meet this number of payments, they are no longer required to make OBL payments, regardless of how much was ultimately repaid.
Payment Limit
This provides an upper bound on how much borrowers can pay in an OBL contract. Limits may be applied to the total amount a borrower pays and/or to the amount a borrower pays in a given month, year or as measured by APR.
Contract Term
The maximum length of an OBL contract, after which the agreement expires regardless of the number of payments made or the aggregate payment amount.
Student benefits of an Outcome-based model
A minimum guarantee of value to achieve education and career mobility.
- Increased confidence in decision to pursue education
- No long-term debt if education does not lead to better career outcome
- Reduce the emotional and psychological trauma associated with traditional debt
- Access to a financing option that is based on future earnings potential and not past credit history
Educator benefits of an Outcome-based model
An increase in enrollment and retention without the operation and regulatory burden.
- Implement innovative loan program without handicapping in-house operations
- Platform performs origination and servicing operations and mitigates regulatory risks
- Gain access to a larger pool of quality students who might otherwise have forgone continued education
- Gather better data on the outcomes of their education service