A new kind of indentured servitude

A new bill seeks to set up the path for investors to invest in the higher education of students.

by Luis Ruuska

Of the approximately 20 million Americans who attend college each year, 60 percent take out loans to cover their education.

Today, student loan debt in the United States totals between $902 billion and $1 trillion. The average borrower owes just over $24,000.

This problem is one that Sen. Marco Rubio, R-Fla., and Rep. Tom Petri, R-Wis., are seeking to tackle with a new bill, the Investing in Student Success Act of 2014.

The bill hopes to authorize the use of income share agreements that allow two parties — a student and an investor — to enter into a contractual agreement in which the investor finances the student’s postsecondary education. In return, the student pays a percentage of their post-graduation income for a set period of time.

Several companies such as UpStart and Pave work as online crowd-funding platforms similar to Kickstarter and allow investors to connect with students. This bill hopes to set up a legal framework for these types of operations.

The clear distinction between income share agreements and private loans is that there is no actual loaning going on in an income share agreement.

Students wouldn’t actually be indebted to their investor(s) upon graduation in the sense that there would be no balance to pay off each month.

 Of course, this is where the catch is for the investors. Because they are not simply receiving repayment for a private loan, investors have a chance to capitalize on their human investments.

Since the program would tie repayment of the agreements to a student’s future income, it’s in the best interest of investors to invest in students who are planning to major in desirable science, technology, engineering and mathematics fields. These degrees will presumably lead to high-paying jobs and a greater return on investment.

Ultimately, students may end up paying back far more than what their education actually cost. Of course, they may end up paying less, too, but smart investors will likely know which students they can capitalize on.

Some critics likened income share agreements to indentured servitude, claiming they give all the power and profit to the investor and little protection to the student. However, this isn’t entirely true.

For one, a student’s future income cannot be more than 15 percent. Additionally, an income share agreement cannot exceed more than 30 years initially, though parties may extend the agreement if students can’t make minimum payments.

Furthermore, the investor has no actual control over the individual. Investors cannot force graduates to take certain jobs or make certain career or financial moves so that they see the greatest return on their investment.

Although I would never enter one, other students might find that the advantages of an income share agreement far outweigh the risks.

For instance, students could have a professional mentoring relationship with their backer throughout their education and beyond. Others might see a debt-free life as the main draw.

Ultimately, I’m open to any plan that offers a solution to the student debt crisis in this country, and this plan does just that — it’s just not for me.