Increasing Education Access for Loan-Averse Students through Income Share Agreements

New research demonstrates the prevalence of loan aversion in the United States. Individuals interested in higher education often decide not to enroll due to uncertainty about the payoff or return on investment of loans. In 2016, researchers at Vanderbilt University presented findings that out of over 6,000 participants, 39% of high school seniors, 33% of community college students, and 23% of adults without a postsecondary degree demonstrated loan-averse behavior. 

If loans are the only education financing available to a prospective student, loan aversion—the unwillingness to take an education loan even if education would likely create long-term financial benefit—can lead individuals to delay enrollment in higher education, enroll part-time rather than full-time, discontinue their studies, or forgo postsecondary education altogether. This underinvestment in education has salient, negative impacts for lifetime earnings and social mobility.

According to the Vanderbilt research team, individuals at risk for loan aversion can include those whose families struggled with debt, particularly during the crash of the housing market in 2007. As more people whose loved ones lost their financial security during the housing crisis consider postsecondary education, loan aversion will likely become an even more pronounced problem for higher education institutions to grapple with. 

In a second study of over 5,600 participants by the same research team, it was found that ISAs have potential for increasing the uptake of education financing offers—in turn bolstering higher education enrollment and retention. 

Income share agreements can help higher education institutions serve loan-averse students by creating a financing option with downside protections. ISAs offer student safeguards—a monthly income threshold below which payments are not due and a cap on lifetime student payments—that typical private loans don’t include. Additionally, ISA payments are set at a percentage of income to encourage affordability across income levels, and interest does not accrue on an income share agreement. 

ISAs are an outcomes-based financing option that reduce some of the risks associated with traditional private student loans, and therefore create a solution that may be appealing to loan-averse prospective students. ISAs can be a critical tool for increasing higher education enrollment and retention for these individuals.

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