Liz Clark, NACUBO’s VP of Policy and Research, sat down with Dr. Jeff Weinstein, Vemo Education co-founder and VP of Strategic Analytics, for a conversation about higher education finance in July 2021. They discussed key insights into the 2020 NACUBO Tuition Discounting Study (TDS), sponsored by Vemo Education.
To hear an abbreviated audio version of their conversation, check out the NACUBO in Brief podcast.
Liz Clark: One of our goals with this study is to help illuminate the relationship between the discount rate, enrollment, and net tuition revenue and learn how to bring balance to each component. Where do you see ISAs in this relationship? How might ISAs help institutions and families alike?
Jeff Weinstein: Thoughtfully designed ISAs, or income share agreements, can reestablish trust between colleges and students. I’ll start with a quick ISA overview. Then I’ll explain how ISAs might fit into the current college enrollment environment.
What are ISAs?
For those who may not have heard about ISAs, ISAs are a fundamentally new way to pay for college, expanding beyond the existing options of traditional student loans, tuition installment plans, etc.. In exchange for ISA funding, a student agrees to pay a fixed percentage of future earned income over a fixed number of payments as long as his or her earnings exceed a minimum amount that typically reflects a multiple of the federal poverty level. One feature of ISAs that loans and tuition installment plans lack is that the ISA automatically expires after a fixed period of time, even if the student has paid less than he or she originally received, or even nothing at all.
Another feature unique to ISAs is that they have a total payment cap, which limits the amount that the highest earners have to pay, so that they do not subsidize the rest of their cohort. Ultimately, ISAs have both downside and upside protections that traditional student loans and other forms of financial aid do not.
ISAs are progressive: Rather than looking at a student’s or family’s financial history, they look ahead to a student’s future. Their income-based payments help ensure participants make payments only when they can afford to do so, and don’t when they can’t. The highest earners typically pay more under this model, and the lowest earners pay less.
This is in contrast to loans, which are more regressive in nature. As in, the highest earners pay less and over a shorter period of time, and the lowest earners and nongraduates pay the most and over the longest period of time. For people without access to traditional education loans—such as international students and those in workforce training programs that do not participate in Title IV—ISAs can also create a pathway to education and training where before there was none.
One of the main ramifications of this for the institution is that the institution can enroll or retain more students, but it doesn’t receive all of its revenue up front. With loans, institutions receive all funds up front and do not have a vested financial interest in what happens to their students beyond that point. Not that they don’t care—they usually care a lot. But graduates’ professional success won’t directly make or break the institution. With an ISA, what the institution receives later—beyond revenue captured for additional students enrolled or retained today—*is* contingent on the outcomes of its students.
ISAs are also much more flexible than the other existing forms of financial aid. Depending on how ISA programs are designed, they can look like a loan, they can look like a tuition installment plan, or they can look like a partial scholarship, which is what some of the 1x payment cap programs do (meaning, the highest earners end up paying the full tuition amount, the middle earners get a partial scholarship, and the lowest earners get a full scholarship, all determined retroactively).
Taken together, ISAs are the first fundamentally new arrow added to the financial aid quiver in over 50 years, basically since the Higher Education Act of 1965.
Uncertainty about College ROI
To put it simply, the sticker price of education—or even the net price of education—is often too high from the perspective of incoming students. Students no longer implicitly assume a 4-year degree is worth the price. They may even consider financing a 4-year degree an inherently risky proposition, given the state of the economy and the world. This uncertainty poses a major hurdle for students, families, and institutions.
Simply voicing a commitment to graduates’ success in the job market may have worked in the past, as it did for my generation (Gen X), but research suggests Gen Z does not trust institutions in general. Today’s students need more than a verbal commitment that institutions care about delivering a strong ROI. They need something (concrete and) material.
ISAs can help colleges and universities strengthen their commitment to ensure that their students thrive after college, either in their careers or in advancing to a graduate program. ISAs signal that colleges have real skin in the game.
ISAs: Revenue and Non-Monetary Benefits
But students aren’t the only ones who benefit from an ISA program. For institutions, they can gain in several ways. Financially, net tuition revenue doesn’t just increase when a new student enrolls. It also rises when an institution does a better job of retaining students and helping them graduate. When retention improves, the institution receives more associated federal and state funds, such as Pell Grants and Direct Loans, and other aid sources.
ISA programs also provide institutions the opportunity to enroll students who previously would have underenrolled in their education for fear of loans. This typically includes underrepresented groups that would greatly benefit from that education.
Finally, higher graduation rates strengthen alumni support—not to mention improved reputation, status, or ranking, which can in turn result in higher donations, increased institutional funding, and greater interest from prospective students.
When colleges implement an ISA program or something else that demonstrates their stake in student outcomes, they benefit when students succeed—not just from the cash flows of the ISA itself but also from the other improvements to student success metrics. If students are graduating more often and more quickly, and having better career outcomes because of a college’s campaigns, the improvements come back to us all in both financial and non-financial ways.