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COVID-19 Is Making College Less Affordable Than Ever. ISAs Could Help.

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COVID-19 Is Making College Less Affordable Than Ever. ISAs Could Help.

The higher education system in the U.S. was already in the midst of a well-documented affordability crisis prior to COVID-19. And like other socioeconomic problems, the pandemic has only made it worse from all sides. 

As a result of the crisis, low-income students appear more likely to drop out of college this fall and less likely to apply for federal student aid. But even higher up the wealth ladder,  surveys have shown that as many as 40% of higher-income families who did not previously plan to apply for federal financial aid now intend to do so, which has in turn prompted concerns that the federal student aid program could run out of money

Things are just as bad in the private financial aid market. Though some private student loan providers have offered relief, the exclusion of private loans from the CARES Act—which put federal loans in forbearance until 2021—left many borrowers without a safety net. For many families, the economic pinch will make it even more difficult to qualify for private financial aid. 

News of these trends has predictably spread to universities. A recent survey of university presidents from Inside Higher Ed found that 90% of respondents are concerned about a long-term decline in overall future student enrollment. 

But there is a potential solution: income share agreements

Through an ISA, students borrow money from their school or a third-party provider and, rather than repaying the loan with interest, they repay a fixed percentage of their future income for a predetermined amount of time.

Income share agreements, also known as ISAs, have gained enough traction that the Department of Education recommended them last year, but they still only represent a fraction of the student loan marketplace. COVID-19 could change that. 

‘The student loan system is broken’ 

According to data firm MeasureOne, roughly 7.8% of U.S. student loan debt in the first quarter of 2020 was from private lenders. Though that may seem like a small percentage, the market appears to be growing.  

The Student Borrower Protection Center reported that outstanding private student loan debt grew 71% in the last decade, outpacing the growth in auto loans, credit card debt, and mortgage debt. 

Income share agreements are an alternative to private loans, according to Chuck Trafton, president and co-founder of Edly, an ISA marketplace. 

“The student loan system is broken,” he said. “There are about $20 billion of private student loans created every year by banks and finance companies that do private lending to families and students. And that market is totally dependent on FICO scores and cosigners, so if you don't have wealthy parents that are willing to cosign for your student loan, you're not going to get approved for a private student loan.”

The COVID-19 crisis has only exacerbated the problem, causing both families and lenders to tighten their belts. Trafton said he has heard of students with parents that have 700 FICO scores (normally high enough for approval at a good interest rate) being quoted 18-19% interest rates on their student loans or being rejected outright if they don't have a cosigner. 

In other words, the barrier to entry into higher education has gotten even higher. Trafton is experiencing more students seeing ISAs as a viable alternative. 

“Edly doesn't use FICO scores and cosigners. We underwrite to your most likely outcome, and not to your parents’ wealth.”

ISAs can also act as a funding solution for a lesser talked about area of higher education—vocational schools. Because there is no federal student loan program for trade schools, students without the credit or wealth to get approved for a private loan are often excluded. 

“These jobs are every bit as high paying as the college graduate jobs, but there are few federal student loans available for vocational schools. And ISAs change that completely.”

Other fields like nursing, accounting, and IT also have known worker shortages. Trafton is hoping ISAs can help fill that gap. 

“If we can change the way we finance education, we can broaden it out to millions of Americans that either go to college and drop out because of the loans, or they never go in the first place.”

 

 

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