The Distribution of Financial Returns to a College Income Share Agreement

• In Event: Issues in Higher Education

Abstract

Income Share Agreements (ISAs) have reemerged as an alternative to student loans, offering college students funding in exchange for a fixed percentage of future earnings. Two competing criticisms shape the policy debate. One argues that adverse selection will unravel the market, as students with low expected earnings self-select into ISAs, requiring unviably high pricing (Herbst and Hendren, 2024). The other contends that institutions may use their position of trust to steer students into ISAs that result in overpayment relative to traditional loans (Warren et al., 2019). Both cannot be true on average.

This study evaluates these claims using administrative data on 1,836 ISA contracts for a total of $20.6 million at a large public university between 2016 and 2022. ISA participants are more likely to be first-generation students, under-represented minorities, and have lower academic indicators than the campus average. Each participant’s total ISA payments through 2024 are compared to a counterfactual federal Parent PLUS loan with matched terms and timing.

Among the 2017 graduation cohort, 69% paid less under the ISA than under the loan counterfactual, saving an average of $3,498; 31% paid more, some over $10,000. Financial benefits are concentrated among non-completers, under-represented students, and graduates in majors with high income variance.
These findings provide the first empirical distribution of realized ISA net benefits at a large public institution and offer new evidence for evaluating equity and sustainability in income-contingent financing.

Author

• Kevin Mumford, Purdue University