College Grads Are Selling Stakes In Their Future In Return For School Funding

College graduate students / Public Domain

Financiers are transforming student debtors into new investments.

In order to pay for college, some students are selling stakes in their future, according to Bloomberg. Amy Wroblewski, for example, must turn over a percentage of her salary every month for eight and a half years. A year after graduation, she now makes $50,000 a year. After giving up the percentage of her salary, she is left with only $279 a month.

Wroblewski agreed to the arrangement when she was an undergraduate at Purdue University. Instead of using a conventional student loan to pay for her education, she began to finance herself through an income-sharing agreement (ISA). Students are essentially becoming stock investments through this new financial instrument.

Wroblewski’s strong work ethic as a first-generation college student who always held at least two part-time jobs in school led to her rise as vice president of Delta Sigma Pi, a business fraternity. Vemo Education, a company which assesses students at certain schools on behalf of investors, was impressed by Wroblewski’s efforts.

In all, Americans owe $1.5 trillion in higher education debt. The Federal Reserve says millennials are now less likely to buy homes and senior citizens are still paying off their student loans. Investors are now capitalizing on this crisis by using ISAs.

“I envision a whole new equity market for higher education in the next five years where today there’s only debt,” says Chuck Trafton, who runs FlowPoint Capital Partners LP, which has invested in ISAs.

The market for ISAs is tiny now compared to the $170 billion in outstanding asset-stacked securities that come from student loans. Schools often don’t allow outside investment firms to buy stakes in students.

The ISA program is raising many questions, such as how will students pay if they lose their job, and how much should be demanded as compensation for the risk?

In the past, financial firms and for-profit colleges have been known to take advantage of naive students to sell them high-priced private loans. Although schools offering ISAs insist that they’ll only offer them after government loans with favorable terms are unavailable, students may eventually regret the decision to use them. ISAs also require that students give up their right to sue in court.

Yale University’s ISA experiment in the 1970s became a cautionary tale.

Many students defaulted on their ISAs and borrowers were left hanging for much longer than expected. Wealthier students were the only ones able to exit the pools with one-time buyouts. Some students, who were generally lower-income, stopped paying altogether. Eventually, Yale bailed out the borrowers and abandoned the ISA program in 2001.

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