Our solution is a new financing structure for education that makes obligation a function of outcome. These outcome-based financing agreements, also known as Income Share Agreements (ISAs), are obligations in which upfront financing is given in return for a commitment to pay a specified percentage of future earnings for a fixed period of time.
Properly designed and operated, an ISA program can improve on existing financing options for students and drive more resources toward proven programs. ISAs can reduce the profound information asymmetry in postsecondary education that disadvantages students and schools alike.
The US is experiencing a crisis in the field of education financing. The cost of higher education has increased massively, yet secondary education has never been more essential to obtaining financial stability. Defaults on student debt have skyrocketed and now have the highest 90+ day delinquency rate of all household debt. The psychological burden of student debt has been shown to negatively affect personal mobility, career and income growth, additional education, and even family planning.
Benefits of an Outcome-Based Model
- Eliminate need-based defaults which will lead to improved future access to credit
- Reduce the emotional and psychological trauma associated with debt
- Provide the freedom to make career choices that are driven by personal interest rather than economic necessity
- Give access to a financing option that is based on future earnings potential and not past credit history
- Move towards a more student-centric education financing model
- Give access to a larger pool of quality students who might otherwise have forgone continued education
- Provide the ability to tap new sources of private capital to assist with student financing
- Gather better data on the outcomes of their education service
- Signal to prospective students that the education provider believes in the economic value of their product
- Provide access to a new asset class that offers stable, attractive returns, is negatively correlated with other FI products, and has built-in inflation protection
- Have positive social impacts outlined in benefits to students
Entail positive macro impacts such as:
- Long-term alignment of education costs with education benefits
- Education financing that does not limit access to/appetite for other credit sources
- Reduction of the emotional burden of debt which is shown to limit individual economic output and mobility